What determines how the burden of a tax is divided between buyers and sellers? Why?

What determines how the burden of a tax is divided between buyers and sellers? Why?

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September 3, 2023
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What determines how the burden of a tax is divided between buyers and sellers? Why?

Answer and ExplanationSolution by a verified expert

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Burden of tax for a party is the proportion of tax that is paid by the party.

Explanation
The burden or incidence of tax is determined on the basis of the price elasticity of demand and supply curves, which is the degree of responsiveness towards a price change.

Since the tax burden and the price elasticity are inversely related to each other, the side lower price elasticity bears most of the tax burden, and vice versa. For example, when the supply curve is more elastic than the demand curve, the burden of tax falls more on the buyers than the sellers since buyers are less responsive to the changes in price.

Conversely, a more elastic demand curve leads to a lower tax burden on consumers and more on producers since in this case producers are less responsive to the price change.

Verified Answer
The division of tax burden between buyers and sellers is determined by their respective price elasticities. This is because the side with the lower price elasticity cannot respond to the price changes as easily as the other party by changing the quantity bought or sold.

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