The allocation of the burden of a tax between consumers and producers; tax incidence is said to fall on the group that bears the burden of tax, no matter from whom the tax is collected.

• A. Regulation
• B. Tax Incidence
• C. Common Resource
• D. Eminent Domain

Answer: (B)

Tax incidence is about who really bears the burden of a tax in the economy. It isn’t determined by who writes the check to the government; it’s determined by how the tax changes prices and quantities in the market. When a tax is added, the market price and the quantity exchanged adjust so that buyers and sellers share the burden.

The key idea is responsiveness to price: which side of the market is less elastic (less able to adjust quantity when prices change) tends to bear more of the tax. If buyers’ demand is relatively inelastic, they can’t cut back much on purchases when the price rises, so they end up paying most of the tax through a higher price. If sellers’ supply is relatively inelastic, they can’t easily reduce supply, so they absorb more of the tax as a lower net price received after the tax. The actual split depends on the relative elasticities of demand and supply, but the economic burden ends up on the side that is less responsive, not necessarily on the entity that remits the tax to the government.