How to Calculate Tax Incidence
Tax incidence splits a per-unit tax by elasticity: consumer burden = new price paid − old price, producer burden = old price − new net price.
The Tax Incidence formula
Calculator
Enter the pre-tax price, the per-unit tax and the new price buyers pay to split the burden.
The price where supply met demand before the tax.
The size of the wedge the government drives between the two prices.
Read off the demand curve at the new, lower quantity.
Of the $3 tax, consumers absorb $2 and producers absorb $1, so demand is the more inelastic side and pays the larger share.
- Price producers keep
- $9
- Producer burden per unit
- $1
- Consumer share of the tax
- 66.7%
- Who bears more
- Consumers bear more (demand is more inelastic)
P(received) = the price consumers pay minus the tax.
Pre-tax price minus what sellers keep. The two burdens always add up to the tax.
Consumer burden ÷ tax. This is the same share the elasticity formula Es/(Es+|Ed|) gives.
How to calculate Tax Incidence, step by step
- 1Find the pre-tax price. Read the equilibrium price before the tax, where supply meets demand. This is the baseline both sides start from.
- 2Find the price consumers pay after the tax. A per-unit tax shifts supply up (or demand down) by the tax amount. Read the new, higher price buyers pay on the demand curve at the new quantity.
- 3Find the price producers keep after the tax. Subtract the tax from the price consumers pay: P(received) = P(paid) − tax. This is what sellers actually keep per unit.
- 4Split the burden. Consumer burden = P(paid) − P(before); producer burden = P(before) − P(received). The two burdens add up to the per-unit tax.
- 5Check against elasticity. The more inelastic side bears the larger share. Whoever can least change their quantity (steeper curve) pays more of the tax.
Worked example: Tax Incidence
A market sits at equilibrium price $10. The government puts a $3 per-unit tax on producers, which shifts supply up. The new price consumers pay rises to $12, and producers receive $12 − $3 = $9. Consumer burden = $12 − $10 = $2 per unit. Producer burden = $10 − $9 = $1 per unit. Check: $2 + $1 = $3, the full tax. Consumers bear $2 of every $3 (two-thirds) and producers bear $1 (one-third), so demand is more inelastic than supply. The burden ratio $2 ÷ $1 = 2 equals Es ÷ Ed, meaning supply is twice as elastic as demand (Es = 2 × Ed).
Elasticity decides the split, and the numbers show it
Who legally owes the tax has no effect on who ends up paying it. What decides the split is which side is less able to walk away.
Hold a $10 tax fixed and vary the curves. With demand four times steeper than supply, buyers carry $8 and sellers $2. With the two equally steep, it splits $5 and $5. With supply four times steeper than demand, buyers carry $2 and sellers $8.
The pattern is exact: the LESS elastic side carries more, every time. A buyer who will pay almost anything cannot avoid the tax by buying less, so the price rises to them. A seller who will supply almost regardless cannot avoid it by producing less, so the price they receive falls.
This is why cigarette and petrol taxes fall mostly on consumers, and why they raise a lot of revenue while destroying comparatively little surplus: inelastic demand means the quantity barely moves.
Tax Incidence questions
What is the tax incidence formula for the share borne by consumers?
The share borne by consumers equals Es/(Es+|Ed|), which follows from the burden rule that consumer burden divided by producer burden equals Es/Ed. In the worked example the burden ratio is 2, so consumers bear two-thirds of the $3 tax.
How do you calculate consumer and producer burden per unit tax?
Consumer burden per unit = the price consumers pay after the tax minus the pre-tax price. Producer burden per unit = the pre-tax price minus the price producers keep. The two burdens add up to the per-unit tax.
What does tax incidence tell you?
Tax incidence tells you who actually bears the cost of a tax, regardless of who legally pays it to the government. The more inelastic side of the market (the one that changes quantity the least) bears the larger share, because they cannot easily avoid the tax by buying or selling less.
Does it matter whether the tax is placed on buyers or sellers?
No. The legal (statutory) incidence does not change the economic incidence. Whether the tax is levied on producers or consumers, the same relative elasticities determine how the burden splits, and buyers and sellers end up paying the same shares either way.
When do consumers bear the entire tax?
Consumers bear the whole tax when demand is perfectly inelastic (a vertical demand curve) or supply is perfectly elastic (a horizontal supply curve). In both cases the price consumers pay rises by the full tax amount and producers keep the same net price.
How does tax incidence relate to deadweight loss?
Both come from the same tax wedge between the price buyers pay and the price sellers receive. The burden split is that wedge times the units still traded; the deadweight loss is the triangle over the units no longer traded because of the tax.
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