Question

Explain the relationship between the statutory incidence and the economic incidence of a unit tax levied in a market.

Answer 1

Ans) Statutory incidence means on whom the government has imposed tax, buyers or sellers. While economic incidence means who bears the real burden of tax.

It does not really matter upon whom the government has imposed tax, burden of tax is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

burden of tax on buyers price paid by buyers after tax tax wedge When supply is less elastic burden of tax on sellers price received by sellers after tax

A burden on buyers When demand is less elastic Tax wedge burden on sellers a