Principles of Microeconomics / Unit 17 MIC 1612 review, 2 to 3 minutes
Who Bears It: Elasticity Decides
The idea
Who bears a wedge is decided by elasticity, and the rule is the same whether the wedge is a tax, a tariff, a control or a monopsonist's markdown: the side that can least escape pays most. A per-unit tax drives a wedge between what buyers pay and what sellers keep. If demand is inelastic and supply elastic, buyers cannot cut back and sellers can move elsewhere, so the buyers' price rises by nearly the whole tax; if demand is elastic and supply inelastic, sellers absorb it. Who writes the check to the government does not matter; the incidence is the same either way. A payroll tax on labor is the same wedge in a factor market: because labor supply is inelastic, workers bear most of a tax nominally split with employers. A tariff is a tax on imports; in a small country the world price does not move, so domestic consumers bear all of it, while in a large one foreign producers bear part, since the importer's demand withdrawal lowers the exporter's price. A price control is a wedge with no revenue: a minimum wage above equilibrium costs jobs in proportion to the elasticity of labor demand, so the same floor is nearly harmless where demand is inelastic and costly where it is elastic; a rent ceiling makes a shortage in proportion to the elasticity of housing supply. And a monopsonist's markdown falls on workers because their supply to the one employer is inelastic. In every case, draw the two curves, find the wedge, and read who moved least.
In practice
Worked example: supply is price equals quantity. With inelastic demand, price sixty minus two times quantity, the market clears at twenty and twenty dollars; a six-dollar tax on sellers gives sixty minus two quantity equals quantity plus six, quantity eighteen, buyers pay twenty-four and sellers keep eighteen: buyers bear four of the six. With elastic demand, price thirty minus half the quantity, the same market clears at twenty and twenty; the tax gives quantity sixteen, buyers pay twenty-two, sellers keep sixteen: buyers bear two, sellers four. Same tax, same starting point, opposite incidence, because demand's elasticity flipped.
Where people slip
Three cautions. Incidence is about prices, not about who is named in the law; a tax on sellers and a tax on buyers of the same size land in the same place. The deadweight loss also depends on elasticity, and it is smallest where the burden is heaviest, since the inelastic side does not change quantity; a tax that lands mostly on buyers distorts least. And a control transfers surplus but collects no revenue, so its incidence has a winner inside the market and a loss with no rectangle to offset it.
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