Elasticity and the Incidence of a Tax
Incidence of the tax depends on relative elasticity of demand compared to elasticity of supply. The tax in
both diagrams is $2 per unit. But the burden of the tax faced by consumers and producers differs.
Supply is relatively more elastic than demand in the diagram to the right. The more elastic supply relative to
demand, the smaller is the burden of the tax on producers relative to consumers. (Notice in the right-hand
diagram the burden of the tax to the producer is only $0.50 whereas burden of the tax to consumers is $1.50).
Price Supply with Price Supply with
8 $2 tax 8 $2 tax
Pp 3 3