Tax incidence in economics analyzes how taxes affect buyers and sellers based on demand and supply elasticities.
Tax incidence is the analysis of the effect of a specific tax on the distribution of economic welfare, focusing on the burden placed on either buyers or sellers in a transaction. The burden of a tax is determined by the price elasticity of demand and price elasticity of supply, rather than where the revenue is collected.
An example scenario would be a tax on wine, where the tax burden can be shared based on whether the demand or supply curve is elastic or inelastic, impacting who bears the larger portion of the tax.
Understanding tax incidence is crucial as it helps identify how different economic actors are affected by taxes, influencing market behavior and overall welfare distribution.
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