According to tax theory, where does the tax burden fall most heavily?

The correct answer is that the tax burden falls most heavily on the side of the market that is less elastic. This principle is founded on the concept of elasticity, which measures how sensitive the quantity demanded or supplied is to changes in price.

When a tax is imposed on a market, the side that is less elastic—whether it is consumers or producers—will bear a larger portion of the tax burden. This is because less elastic participants are less sensitive to price changes; they do not significantly reduce their quantity demanded or supplied when the tax raises prices. For example, if consumers have few substitutes for a product, their demand is inelastic, and they will continue purchasing the product despite higher prices due to the tax. On the other hand, if producers face small changes in quantity produced with price fluctuations, their supply is also inelastic, leading them to absorb more of the tax cost.

In contrast, the side of the market that is more elastic can more easily adjust to changes and will shift some of the burden to the less elastic side. Thus, the tax burden is shared, but it disproportionately affects those less able to alter their behavior in response to price changes. This dynamic highlights the importance of understanding elasticity in analyzing tax policies and their effects on different market