okay let me place steeper demand curve less elastic demand curve than supply curve on the left hand side on the right hand side I play bit I place steeper supply curve then the demand curve and then I apply same tax rate in both cases by marking tax wedge this red line right you can see the size of text here it's identical across both situation once we impose this text we can observe New prices the price buyer pay price seller receive Now here is where it gets interesting After applying the tax we look at how price change what buyers pay now what seller receive by comparing those new prices to the original pre-tax price We can see who shoulders more of the burden In the first case here where demand is less elastic buyers bear more burden right you can see here this is buyers burden this is sellers burden in the second case where supply is less elastic then seller take more burden right and this is bias burden so seller take more burden so what is the big takeaway yeah it's all about elasticity Whoever is less responsive to price changes end up paying more of the tax The key takeaway is this The side of the market that is less responsible to price changes less elastic right They bear more of the tax burden To make this more intuitive let's take it to extreme Suppose one side say buyer don't care about price at all The demand is perfectly inelastic just a vertical line right in the case buyer would bear entire burden of tax because they are not going to reduce their demand no matter what the price is So what does this mean in practical terms If one side say seller can easily exit the market or adjust their behavior when price change it while the other side the buyer can then buyers are going to end up paying more of the tax It all comes down to flexibility The more elastic side of the market can avoid more of tax by adjusting while the less elastic side get stuck with a bigger share Now imagine demand cur becomes steeper and steeper more inelastic right then yeah intuition suggest consumer ends up taking more of tax burden while seller take on less right If supplier becomes steeper then seller carry on more of the burden buyer take on less of the burden Here is a extreme case to really illustrate the concept This think about the demand for insulin So it's nearly perfectly inelastic People need it every day regardless of the price Now let's say tax is imposed on seller Well remember for tax instance it doesn't matter whether tax is placed on buyer or seller but outcome is same right but we are just doing this using this setup for illustration So there is tax right the outcome is same I mean whether it's placed on sell or buyer Now supply cover sip to the left by amount of text from this price right pretext price and to this price Now buyer end up paying more and seller receive what do you see just the same amount as they did before the tax in this case In other words buyers spare full burden of the tax Why Yeah Because they can't change how much insulin they buy It's life necessity Their demand is perfectly inelastic Meaning they don't respond to price changes In this situation market price rise by exactly the amount of the tax Yeah Of course this is rare Usually when both the demand and supply are flexible I mean they are slow right then tax is share between buyer and seller but when one side is completely inelastic like this in this case then that size absorb full cost and tax rise I mean price rise by tax rate okay let's bring in real world example in 1990 Congress introduced luxury tax on things like yacht private plane and yeah many other expensive items The idea was yeah you can guess right just to make the wealthy pay more tax right Oh this is by the way very different from wealth tax people are talking about these day Yeah wealth tax is a tax on income but this is just tax on luxury good But yeah we guess yeah most likely wealthy people buy these goods So maybe they are hoping wealthy people pay taxes But now you can see what is wrong with the assumption their argument The issue is what just because wealthy consumer are paying for these item doesn't mean they actually bear the burden of the tax Who really bear burden of luxury tax Yeah this is a good question I mean important question right But without understanding economies people don't know how to ask this question What really matter is elasticity Luxury good usually have many substitutes So their demand is elastic right Where the buyer can simply choose not to buy them So with the relatively elastic demand flat demand and any kind of supply Yeah you can do this exercise just to mark text wet then you can see tax burden burden ends up burning more on which part seller right producer that's what happened companies making these products were hurt even though the taxes targeted the rich but company in addition Workers in those industry they bear the burden of tax means they lose jobs In fact study by joint economic committee found that the yacht tax alone cost 7600 American job Let's look at another example The payroll tax What shows up on your paycheck as a deduction for social security and Medicare It's often called the PA FICA It's a 15.3% poorer but split equally between employee and employer So you pay 7.65% 65% and your employer also pay 7.65% Seems fair right But again who really bear the burden Well it doesn't depend on you know how to divide this tax between employer and workers It all depend on depend on elasticity Economists have studied this and found that in the labor market labor supply is inelastic Still workers are less sensitive to age change On the other hand the labor demand from employers more elastic They will reduce hiring If wage rise too much so what does this mean Even though employers pay half of the payroll tax on paper in reality workers bear most of the burden That's the consensus among labor economists Let's wrap up with a few practice question So buyers bear most of tax burden when tax is placed on them Is that correct Well it's false The tax placement doesn't determine the burden right What matter is elasticity Well buyer pay majority of tax burden when demand is more elastic than supply It's also force because sellers are less responsible Seller bear most of tax burden If tax is imposed on market with inelastic demand and elastic supply then but no tax will be shared equally not necessarily again it depends on relative elasticity right if both are equally elastic then yes but they are rare so in general this is not correct buyer bear most of the burden of X That is correct If buyers are less responsible to price they end up shouldering more of the cost