Explain the concept of tax incidence.

Tax incidence refers to the distribution of the burden of a tax between buyers and sellers in a market. It analyzes who ultimately bears the economic burden of a tax, whether it is the consumers, producers, or both. The tax incidence is determined by the relative price elasticities of demand and supply.

When a tax is imposed on a good or service, it affects the equilibrium price and quantity in the market. If the demand for a good is relatively inelastic (less responsive to price changes) compared to the supply, the burden of the tax falls more on the consumers. In this case, consumers are less able to adjust their quantity demanded in response to price changes, so they end up paying a larger share of the tax.

On the other hand, if the supply of a good is relatively inelastic compared to the demand, the burden of the tax falls more on the producers. Producers are less able to adjust their quantity supplied in response to price changes, so they bear a larger share of the tax burden.

In some cases, the burden of the tax may be shared between consumers and producers, depending on the price elasticities of demand and supply. The tax incidence can also vary depending on the relative market power of buyers and sellers.

Overall, tax incidence helps to understand the distributional effects of taxes and how they impact different stakeholders in the economy.