Incidence of tax

Incidence of Tax – Incidence of tax refers to who ultimately bears the economic burden of a tax—whether it is the producer (seller) or the consumer (buyer). It depends on the elasticity of supply and demand, i.e., how responsive quantity supplied or demanded is to changes in price. Key Points: Consumer bears more if demand is inelastic and supply is elastic. Producer bears more if supply is inelastic and demand is elastic. Helps in understanding the true economic impact of taxation beyond who legally remits the tax. Example: If a government imposes a tax on petrol, and demand remains largely unchanged despite price increases (inelastic demand), most of the tax burden falls on consumers, who pay higher prices at the pump.