Who Really Pays a Tax?
Tax incidence: trade it, explain it, practice it
First you trade. Then we explain what happened.
1 · Trade
A live market on your phone: a practice round and five real rounds. From Round 2 on, every trade carries a 12-point tax.
About 35 minutes.
2 · Explain
Read our class's results, then the theory: who actually bears a tax, and why it depends on elasticity.
3 · Practice
Predict who bears a tax, put numbers on the burden, and finish with the exit ticket.
Trade one unit—and maximize your own payoff
How the market works
- Half the class are Buyers, half are Sellers. Your role is dealt once and never changes.
- You see only your own value (buyers) or cost (sellers). Keep it private. It can change from round to round.
- Buyers submit bids; sellers submit asks. You can change or cancel yours until you trade.
- When the highest bid meets the lowest ask, those two trade at the price halfway between them.
- You trade at most one unit per round. Not trading is allowed and pays 0.
- The market refuses any quote that could make you lose points. Your screen shows your safe limit and a payoff preview.
Buyer payoff
Value − what you pay
Seller payoff
What you keep − cost
Your goal
Maximize your own points. Everything is in points; nothing here affects your grade.
From Round 2 on, every trade carries a 12-point tax
Tax collected from buyers
Arithmetic example: posted 50 → the buyer pays 62, the seller keeps 50.
Tax collected from sellers
Arithmetic example: posted 50 → the buyer pays 50, the seller keeps 38.
The tax box at the top of your screen says who sends the tax in, every round.
A practice market, then five rounds of 90 seconds
| Round | Tax | What to know |
|---|---|---|
| Practice | none | Learn the buttons. These points do not count. |
| Round 1 | none | The baseline market. Its typical price becomes our no-tax price, P0. |
| Round 2 | 12 points, sent in by buyers | Same market as Round 1. |
| Round 3 | 12 points, sent in by sellers | Same market again. Only the side that sends in the tax changes. |
| Round 4 | 12 points, sent in by buyers | A different good. Read the story at the top of your screen. |
| Round 5 | 12 points, sent in by buyers | Another different good. Read the story again. |
Join the market
1 · Scan the QR code or open
tax.zihanzhang.trade/room/are201_unit62 · Read the rules and answer the two quick checks.
3 · Wait on the market page. Your role appears when roles are dealt.
Anonymous · no names · one tab
Why did the tax land where it did?
First our class's numbers, then the theory that explains them.
Before any theory: what did our market do?
The law moved the tax to sellers
Did buyers end up paying much less once sellers had to send the tax in?
Tab: Buyer tax vs seller taxSame tax, both times on buyers
Who bore more of it in Round 4? In Round 5? What was different about the two goods?
Tab: Who pays?Trades that disappeared
How many fewer trades happened once the tax arrived? Who lost those gains?
Tab: Wedge & quantity| On your results screen | On today's graphs |
|---|---|
| Buyer total payment, PB | P buyers pay—tax included |
| Seller net receipt, PS | P sellers keep—tax removed |
| P0 (Round 1 price) | P before tax. Buyers' burden = PB − P0; sellers' burden = P0 − PS. The two add up to the tax. |
Every gallon of gas carries a tax. Who actually pays it?
Federal and North Carolina motor fuels taxes are collected from the supplier, not from you at the pump. No line on your receipt says “tax.”
Vote before we draw anything. Of each dollar of gasoline tax, who ends up worse off by more?
Remember the elasticity lecture: the price elasticity of gasoline demand over a month came out at 0.28.
You can draw a tax two ways. They give identical answers.
Way 1 · shift the supply curve
A $1 tax is a $1 addition to the seller's cost of every unit, so supply shifts up by exactly $1.
Way 2 · drive a wedge
Leave both curves alone. Find the quantity where the vertical gap between them is exactly $1.
Your textbook draws it the same way—the supply shift is left out there too, for the same reason.
A $1.00 tax does not raise the price by $1.00
Numbers chosen for illustration; they are not current federal or North Carolina rates.
Who writes the check does not determine who bears the burden
Tax the seller $1.00
Supply shifts up by $1.00. The market price becomes $3.80.
- Buyers pay $3.80
- Sellers collect $3.80, remit $1.00, keep $2.80
- Quantity: 75 million
Tax the buyer $1.00
Demand shifts down by $1.00. The market price becomes $2.80.
- Buyers pay $2.80 plus $1.00 tax = $3.80
- Sellers keep $2.80
- Quantity: 75 million
So “we will tax the oil companies, not drivers” is a claim about the wrong kind of incidence.
The more inelastic side of the market bears more of the tax
If supply is more inelastic than demand, sellers bear most of the burden.
escape routes
has nowhere to go
the tax
Gasoline, one month
Buyers cannot change car, commute, or home by Friday. Sellers can redirect fuel to other markets. Buyers are the trapped side.
The same tax over ten years
Buyers get a more efficient car, move closer to work, change jobs. The trapped side becomes less trapped, and the buyers' share falls.
Flip which side is trapped and the burden flips with it
Inelastic demand, elastic supply
Gasoline. Buyers have no short-run alternative; sellers do.
Elastic demand, inelastic supply
Beachfront hotel rooms, or prime farmland. Sellers cannot move; buyers can vacation elsewhere.
Identical $1.00 tax, identical P before tax. The only thing that changed is which side had somewhere else to go. illustrative Vertical scale exaggerated so the split is visible.
In our market, an escape route was a trader near the margin
| Programmed market | Buyers who quit if they pay 6 more | Sellers who quit if they keep 6 less | Theory: buyers' share of the tax |
|---|---|---|---|
| Rounds 1–3 | 4 | 4 | 50% |
| Round 4 | 3 | 7 | 75% |
| Round 5 | 7 | 3 | 25% |
Values and costs as programmed for a class of 50 (25 buyers, 25 sellers), measured from the no-tax price of 60: buyers with value 60–66, sellers with cost 54–60. The dashboard's Demand & supply tab shows our class's full curves.
Round 4
Most buyers valued the good far above 60, so few were close to walking away. Many sellers had costs just under 60 and quit as soon as their price slipped. Demand was much less elastic than supply, so the price buyers paid had to rise.
Round 5
The mirror image: buyers crowded near the margin, sellers did not. Supply was much less elastic than demand, so the price sellers kept had to fall.
Two excise taxes. Predict who bears each one.
A · Cigarettes
A new tax on cigarette manufacturers. Adult smokers' demand elasticity is about 0.3. Producers can adjust output freely.
B · Restaurant meals
A new tax on restaurants. Demand elasticity is about 2.27—diners can cook at home. Restaurants have limited ability to exit quickly.
Revenue collected, and trades destroyed
Revenue = tax × Qtraded
$1.00 × 75 million = $75 million. A transfer—it moves from buyers and sellers to the government, and nothing is destroyed.
Deadweight loss
The 15 million gallons between 75 and 90 were worth more to buyers than they cost sellers. Those trades no longer happen, and nobody gets that surplus—not even the government.
Corollary: the more inelastic both sides are, the smaller the deadweight loss and the larger the revenue. That is the efficiency case for taxing inelastic goods—and it collides with the fairness case, since inelastic goods are often necessities.
Three lessons from our market
Who writes the check does not decide who bears the tax
Round 2 vs Round 3
Statutory incidence is set by law. Economic incidence is set by the market.
The more inelastic side bears more
Round 4 vs Round 5
Find the trapped side: the one with fewer escape routes absorbs more of the tax.
A tax destroys trades, not just money
Round 1 vs every taxed round
Revenue is a transfer. The trades that no longer happen are deadweight loss.
Practice
Three problems from the Unit 6 review set, then the exit ticket.
Apply the incidence rule
Demand for alcohol is highly inelastic. The burden of a higher alcohol tax falls mainly on…
Buyers have the fewest escape routes, so they absorb most of the tax.
A fuel tax is imposed where the price elasticity of supply is 0 and demand is perfectly elastic. Who pays the tax?
Buyers leave at any price above the market price, and sellers cannot change quantity at all—so sellers bear the entire tax.
A $2.00 tax per bottle: who pays how much?
Numbers chosen for illustration.
Before: $10.00 and 100,000 bottles. After a $2.00 tax: buyers pay $11.60, sellers keep $9.60, and 96,000 bottles sell.
Same tax, two different goals
A city wants the most revenue from one tax, and a tax works like a price increase. Using these published |Ed| values, which good should it tax?
The most inelastic good: quantity barely falls, so the tax keeps its base (holding market size equal).
A state taxes junk food so that people eat less of it. For the tax to actually deter consumption, demand for junk food should be…
Only elastic demand makes quantity fall a lot. The catch: that same response shrinks the revenue the tax collects.
One tax, three questions
(a) Who bears more, and why?
(b) Much or little revenue?
(c) After ten years, is the buyers' share bigger or smaller?
(a) Buyers—they are the more inelastic side, so they have the fewest ways to escape the tax. (b) A lot of revenue, because inelastic demand means quantity barely falls, and revenue is tax × quantity traded. (c) Smaller. Over ten years buyers find substitutes—different vehicles, homes, commutes—so demand becomes more elastic and the burden shifts toward sellers.