Tax incidence refers to the analysis of the effect of a particular tax on the distribution of economic welfare. It examines who ultimately bears the burden of a tax, whether it is the producers, consumers, or both. The incidence can differ from the statutory burden, which is the legal obligation to pay the tax. For example, when a tax is imposed on producers, they may raise prices to maintain profit margins, leading consumers to bear part of the cost. This results in a nuanced relationship where the final burden depends on the price elasticity of demand and supply. In general, the more inelastic the demand or supply, the greater the burden on that side of the market.
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