The document discusses tax incidence and how the burden of taxes shifts between sellers and consumers. It explains that when a tax is imposed on cigarettes, the initial burden falls on the seller but they can shift it to consumers by raising prices. Whether the tax burden ultimately falls more on sellers or consumers depends on the elasticity of supply and demand - the more inelastic side bears more of the tax burden. Specifically, if supply is elastic then sellers are sensitive to price changes and consumers will end up paying the tax through higher prices.

1. TAX INCIDENCE AND IT’S
EFFECT ON SUPPLY
BY:
CHHAVI DUDEJA

2. In other words – who bears the burden of taxes?

3. Suppose government imposes tax on manufacturing of cigarettes.
The burden of tax falls on the seller (impact of tax), but he shifts the
burden through price variation (change in price) and the incidence
(final burden) falls on the consumer.
Hence shifting is a legal process which happens due to price
variation.
L
M

4. BURDEN DEPENDS ON RELATIVE
ELASTICITY
Shifting of tax depends upon elasticity of demand and supply.
The more inelastic one’s relative supply and demand, the larger the
tax burden one will bear.

5. WHO PAYS THE TAX?
L
N
M
O
Q

6. When sellers are price sensitive “supply is elastic” it is the
buyers who pay the tax.
Tax Incidence on Buyers
Tax Incidence on Sellers

7. M
M
N
N
L
L
O O