Tax Incidence, explained.
Tax incidence describes how a tax changes economic burdens rather than merely who formally remits the payment.
Why it happens
Demand is P=100−Q and supply P=2Q. A tax t creates a buyer–seller price wedge and quantity (100−t)/3; buyers bear t/3 and sellers 2t/3 relative to the untaxed equilibrium.
Tax incidence describes how a tax changes economic burdens rather than merely who formally remits the payment.
Read the result
Buyer price and seller net price differ by the tax wedge. Formal remittance and economic burden are not treated as the same quantity.
A worked example
Split a thirty-unit tax under known slopes
Start from the untaxed equilibrium quantity one hundred divided by three.
Set the tax to thirty and inspect quantity seventy divided by three.
Compare the buyer burden ten and seller burden twenty, which follow the specified supply and demand slopes.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Demand is P=100−Q and supply P=2Q. A tax t creates a buyer–seller price wedge and quantity (100−t)/3; buyers bear t/3 and sellers 2t/3 relative to the untaxed equilibrium.
Where this idea is useful
A practical use
Separate legal remittance from changes in prices and net receipts when evaluating a transaction tax.
A common misconception
“The party who remits the tax necessarily bears its whole economic cost.”
Price adjustment can distribute the burden across both sides of a market, depending on responsiveness and the market structure.
What this explanation leaves out
- The stated linear competitive curves omit evasion, externalities, market power and heterogeneity. Incidence fractions are specific to these slopes.
Are one-third and two-thirds universal incidence shares?
No. They come from this particular linear demand slope minus one and supply slope two, not a general tax rule.
Which behavioural responsiveness determines the burden beyond the legal payment instruction?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.