higher prices. The analysis, or manner, of how a tax burden is divided between consumers and producers is

called tax incidence. Typically, the tax incidence, or burden, falls both on the consumers and producers of the

taxed good. However, if one wants to predict which group will bear most of the burden, all one needs to do is

examine the elasticity of demand and supply. In the tobacco example, the tax burden falls on the most inelastic

side of the market.

If demand is more inelastic than supply, consumers bear most of the tax burden, and if supply is more

inelastic than demand, sellers bear most of the tax burden.

The intuition for this is simple. When the demand is inelastic, consumers are not very responsive to price

changes, and the quantity demanded reduces only modestly when the tax is introduced. In the case of

smoking, the demand is inelastic because consumers are addicted to the product. The government can then
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