Inelastic demand leads to consumers bearing the burden of an increase in a sin tax, while elasticity of supply and demand determines tax incidence.
The burden of an increase in a sin tax usually falls on consumers when demand is inelastic. This means that consumers end up paying a higher price for the taxed good. Tax incidence, the division of the tax burden between consumers and producers, depends on the elasticity of demand and supply.
Illustration with supply and demand curves: When the demand is relatively inelastic compared to supply, consumers bear most of the tax burden, leading to higher prices. Conversely, when supply is relatively inelastic compared to demand, producers bear most of the tax burden, resulting in lower prices.
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