When a tax is imposed on a good, the actual incidence of the tax generally
A) falls entirely on the buyer.
B) falls entirely on the seller.
C) is shared between the buyer and seller.
D) is the same as the statutory incidence.

Question

Quizplus · Accepted Answer

The actual incidence of a tax is determined by the elasticity of demand and supply for the good. In general, both the buyer and the seller share the burden of the tax, but the amount each pays depends on the relative elasticity of their reactions to the price increase. If the demand for the good is relatively inelastic (i.e. buyers are not very sensitive to price changes), then the burden of the tax will fall mostly on the buyer. If, on the other hand, the supply of the good is relatively inelastic (i.e. sellers are not very responsive to price changes), then the burden of the tax will fall mostly on the seller. In most cases, however, both parties will pay some of the tax.

When a Tax Is Imposed on a Good, the Actual