3.2.1—Indirect tax impact/incidence

An indirect tax creates a wedge between the price paid by consumers and the price received by producers. Incidence is the share of the burden borne by each side, determined largely by relative elasticities.

The less elastic side has fewer alternatives and tends to bear more of the tax through a larger price change or lower net receipt. The legal payer need not bear most of the economic burden.

A tax on a product with inelastic demand may raise the consumer price substantially; with elastic demand, producers may absorb more through a lower received price.

“The firm pays the tax” describes collection, not necessarily final incidence.