Sellers Bear A Smaller Incidence Of A Tax When:
What is Tax Incidence?
Tax incidence is the economic study of who ultimately shoulders the burden of a particular tax. It is a measure of how taxes affect the distribution of income and wealth among different groups in an economy. In other words, it looks at the impact of taxes on different economic players and how the burden of the tax is shared between buyers and sellers. This can be a complicated topic, but in this article, we will look at how tax incidence works and what factors influence it.
How Does Tax Incidence Work?
Tax incidence works by looking at the change in price that a particular tax causes. This can be done by looking at the difference between the pre-tax and post-tax prices of a good or service. If the post-tax price is higher than the pre-tax price, then the buyer will bear more of the burden of the tax. If the post-tax price is lower than the pre-tax price, then the seller will bear more of the burden of the tax.
Factors That Influence Tax Incidence
There are several factors that influence the incidence of a tax. The most important factor is the elasticity of demand and supply. If the demand for a good or service is inelastic, then the buyer will bear more of the burden of the tax. This is because the buyer is not able to switch to a cheaper substitute. On the other hand, if the demand for a good or service is elastic, then the seller will bear more of the burden of the tax. This is because the seller will have to lower the price in order to attract customers.
Tax Incidence on Sellers
When looking at the incidence of a tax on sellers, the primary factor is the elasticity of supply. If the supply of a good or service is inelastic, then sellers will bear a smaller incidence of the tax. This is because the seller cannot easily find another supplier who can provide the same goods or services. On the other hand, if the supply of a good or service is elastic, then sellers will bear a larger incidence of the tax. This is because the seller can easily switch to another supplier who can provide the same goods or services at a lower price.
Tax Incidence on Buyers
When looking at the incidence of a tax on buyers, the primary factor is the elasticity of demand. If the demand for a good or service is inelastic, then buyers will bear a larger incidence of the tax. This is because the buyer is not able to switch to a cheaper substitute. On the other hand, if the demand for a good or service is elastic, then buyers will bear a smaller incidence of the tax. This is because the buyer can easily switch to another supplier who can provide the same goods or services at a lower price.
Conclusion
Tax incidence is an important concept in economics. It is a measure of how taxes affect the distribution of income and wealth among different groups in an economy. When looking at the incidence of a tax, the primary factors are the elasticity of demand and supply. If the demand or supply is inelastic, then sellers will bear a smaller incidence of the tax. On the other hand, if the demand or supply is elastic, then buyers will bear a larger incidence of the tax.
References
1. Tucker, Irvin B. (2016). Economics for Today (9th ed.). Cengage Learning.
2. Mankiw, N. Gregory (2009). Principles of Economics (5th ed.). Cengage Learning.
3. Baumol, William J. and Alan Blinder (2013). Microeconomics: Principles and Policy (12th ed.). Cengage Learning.