The relationship between elasticity and tax incidence is crucial for understanding how the burden of a tax is distributed between consumers and producers. Elasticity measures how responsive the quantity demanded or supplied is to changes in price. Specifically, the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price, while the price elasticity of supply is the percentage change in quantity supplied over the percentage change in price.

When a tax is imposed, the distribution of the tax burden depends on the relative elasticities of demand and supply. If demand is inelastic and supply is elastic, consumers will bear a larger share of the tax burden. This is because consumers are less responsive to price changes; they will continue to purchase the good even if the price increases due to the tax. Conversely, if supply is inelastic and demand is elastic, producers will shoulder more of the tax burden. In this scenario, producers cannot easily reduce the quantity they supply in response to price changes, leading them to absorb a larger portion of the tax.

For example, consider a market with elastic supply and inelastic demand. The demand curve is steep, indicating that consumers will continue to buy the product despite price increases. When a tax is applied, the price consumers pay rises significantly, while the price received by producers only increases slightly. Thus, consumers end up paying a larger portion of the tax. In contrast, if the supply curve is steep (inelastic) and the demand curve is flatter (elastic), the opposite occurs: producers will face a larger tax burden as they cannot easily reduce their output in response to the tax.

In summary, the more inelastic the curve—whether it be demand or supply—the greater the tax incidence on that side. This principle holds true even when both curves are elastic or inelastic; the side that is relatively more inelastic will bear a larger share of the tax burden. Understanding these dynamics is essential for analyzing the effects of taxation on different markets and the welfare of consumers and producers.