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Elasticity and Taxes

How do taxes affect market exchanges? When a tax is placed on the sale of a good, who bears the burden? Economists use the term tax incidence to indicate how the burden of a tax is actually shared between buyers and sellers. When a tax is imposed, the government can make either the buyer or the seller legally responsible for payment of the tax. The legal assignment is called the statutory incidence of the tax. However, the person who writes the check to the government - the person statutorily responsible for the tax - is not always the one who bears the burden. The actual incidence of a tax may lie elsewhere. If the actual incidence of a tax is independent of it's statutory assignment, what does determine the incidence? To help us answer these questions, it will help to take a look at tax incidence in more detail and the importance of looking at elasticity in our analysis.


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