Who pays an excise tax

Who bears a tax depends on how prices move, not on who writes the check.

Before the tax, the price was P0. After it, buyers pay P1, which is higher than P0, so consumers carry part of the tax. Sellers keep P2, which is lower than P0, so producers carry the rest. The tax t equals the rise for buyers plus the fall for sellers.

The split happens because neither curve is perfectly flat or perfectly vertical. Consumers would carry all of it only if demand were perfectly inelastic or supply perfectly elastic, and producers would carry all of it only in the reverse cases. With the ordinary slopes on this diagram, both sides share the burden.

Each choice

• A. If consumers carried the whole tax, their price would rise by the full t. On the diagram the price they pay rises only from P0 to P1, which is less than t.
• B. If producers carried the whole tax, the price buyers pay would not change. It does rise, from P0 to P1.
• C (correct). Buyers pay more than before and sellers keep less than before, so each group pays part of the tax.
• D. This mixes up who legally hands over the money with who is made worse off. Whoever writes the check, prices adjust so that both buyers and sellers lose part of the tax.
• E. The government collects the tax; it does not pay it. The money comes from buyers through higher prices and from sellers through lower prices.