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When the government taxes producers, both consumers and producers share the tax burden, which is referred to as tax incidence or tax wedge. This video tutorial explores the impact of taxes on consumers and producers under different demand elasticities. When demand is inelastic, the introduction of a tax shifts the supply curve, leading to a new price (P1) and quantity (Q1). The price consumers pay increases, but producers receive less due to the tax wedge, which is the vertical distance between the supply curves that represents the tax per unit. Ultimately, consumers bear a portion of the tax through higher prices, while producers absorb the remainder.
