Outcome: Tax Incidence

What you’ll learn to do: explain how the price elasticities of demand and supply affect the incidence of a sales tax.

In this outcome, you’ll learn about who bears the burden of a tax. Imagine a $1 tax on every barrel of apples an apple farmer produces. If the product (apples) is price inelastic to the consumer the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. In this example, consumers bear the entire burden of the tax; the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer. If the apple farmer can raise prices by an amount less than $1, then consumers and the farmer are sharing the tax burden.

LEARNING ACTIVITIES

The learning activities for this section include:

• Reading: Tax Incidence
• Self Check: Tax Incidence

Take time to review and reflect on each of these activities in order to improve your performance on the assessment for this section.