Who bears the economic burden of a tax?

The economic burden of a tax is shared between consumers and producers, making the correct answer that both are affected. When a tax is imposed, it influences the prices that consumers pay for goods and services and the amount that producers receive.

When a tax is levied, producers may increase prices to maintain their profit margins, thereby passing some of the burden onto consumers through higher prices. Conversely, if producers cannot raise prices sufficiently due to competitive market pressures, they may absorb some of the tax themselves, reducing their profit margins. The extent to which each party bears the burden depends on the price elasticity of demand and supply. If demand is inelastic (consumers are less sensitive to price changes), consumers will generally shoulder a larger portion of the tax burden. If demand is elastic, producers may absorb more of the tax burden to avoid losing sales.

Therefore, both consumers and producers share the economic burden of taxes, highlighting the interconnectedness of markets and how taxes influence overall economic behavior.