<P> Tax incidence can be calculated using the pass - through fraction . The pass - through fraction for buyers is PES / (PES - PED). So if PED for apples is - 0.4 and PES is 0.5 then the pass - through fraction to buyer would be calculated as follows: PES / (PES - PED) = 0.5 / (0.5 - (-. 0.4)) = 0.5 / 0.9 = 56% . 56% of any tax increase would be "paid" by the buyer; 44% would be "paid" by the seller . From the perspective of the seller, the formula is - PED / (PES - PED) = - (- 0.4) / (0.5 - (- 0.4)) = 0.4 ∕. 9 = 44% </P> <P> Because the producer is perfectly inelastic, they will produce the same quantity no matter the price . Because the consumer is elastic, the consumer is very sensitive to price . A small increase in price leads to a large drop in the quantity demanded . The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax . Because the consumer is elastic, the quantity change is significant . Because the producer is inelastic, the price doesn't change much . The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer . In this example, the tax is collected from the producer and the producer bears the tax burden . This is known as back shifting . Tax incidence or burden does not in any way depend on where the revenue has been collected . It rather depends on the price elasticity of demand as well as the price elasticity of the supply . Tax burden as seen refers to the people who pay the taxes whether producer or consumer and considers the societal effects that result . It is said to fall entirely on the group that bears the burden or who has to pay the tax . </P> <P> If, in contrast to the previous example, the producer is perfectly inelastic, he will continue producing the same quantity no matter the price . In case that the consumer is elastic; the consumer becomes very sensitive and weary of the price (Melville 24). A small increase in the price of something leads to a large drop in the quantity that is being demanded . The imposition of taxes causes the market price to have an increase from P without taxes . It rises to P with taxes . In most markets, elasticities of the supply and demand are similar to the short - run and result in the burden of the taxes that has been imposed . The tax that has been imposed is shared between two groups and in varying proportions . In general, the group that will have a greater tax burden is the one that exhibits greater relative inelasticity (Prasad 49). When there is an increase in elasticity in one place, the demand for the quantity changes so that it can suit the different needs that have been set by the tax burden . Tax burden, therefore, varies a lot with elasticity in materials . </P> <P> Most markets fall between these two extremes, and ultimately the incidence of tax is shared between producers and consumers in varying proportions . In this example, the consumers pay more than the producers, but not all of the tax . The area paid by consumers is obvious as the change in equilibrium price (between P without tax and P with tax); the remainder, being the difference between the new price and the cost of production at that quantity, is paid by the producers . </P>

Who bears the burden of taxes when a product is inelastic