The seller pays the levy, but who bears its burden? Elasticity of demand and the question of who really pays

When a fixed levy is put on every unit of a product, people usually say: "The buyer pays it anyway, the seller just adds it to the price." Economic theory gives a more precise answer: the levy passes into the price partly, and that part varies sharply from market to market.

Key rules

• The legal burden and the economic burden are different things. The legal burden is about who calculates and remits the levy. The economic burden shows whose income or purchase became more expensive because of the levy, and by how much
• If the levy is collected from the seller, a new equilibrium forms in the market: the price the buyer pays rises somewhat, and the price the seller keeps falls somewhat. The two changes add up to the amount of the levy
• The side less sensitive to price bears more of the burden. If the buyer has many alternatives, they give up the product that has become dearer, and most of the burden stays with the seller. If there is no alternative, the price rises almost in full
• With linear demand and supply, the buyer's share = Es / (Es + |Ed|), where Es is the elasticity of supply and Ed the elasticity of demand (both at the equilibrium point)
• Even if the law makes the buyer, not the seller, pay the levy, the result is the same: the final prices and shares depend on the elasticities, not on what is written in the law
• The levy shrinks the market: buyers buy less and sellers offer less. The more the volume falls, the less the levy brings in
• This logic applies not only to taxes but to any per-unit cost: if a supplier adds an extra charge to every box, how far the seller can pass it on in the price also depends on buyers' sensitivity

Example: one levy, two markets

Suppose a fixed levy of 3 000 soums per box is introduced on two products in a wholesale market, and the seller pays it (a fictional situation; all figures hypothetical, compiled by the author). Price P is in thousand soums, quantity Q in boxes per day. Supply is the same in both markets: Qs = 30 × (price kept by the seller) − 300.

• Product A: packaged iced tea, the buyer has many alternatives. Demand: Qd = 1 500 − 60 × P
• Product B: table salt, almost no alternative, purchase volume depends little on price. Demand: Qd = 450 − 7.5 × P

Before the levy the equilibrium is the same in both markets: P = 20 thousand soums, Q = 300 boxes. Elasticities at the equilibrium point: Es = 30 × 20 / 300 = 2; for A, Ed = −60 × 20 / 300 = −4 (elastic demand); for B, Ed = −7.5 × 20 / 300 = −0.5 (inelastic demand).

The calculation for A, for example: if the buyer's price after the levy is P, the seller keeps P − 3. From the equation 1 500 − 60 × P = 30 × (P − 3) − 300 we get 90 × P = 1 890, i.e. P = 21; the seller keeps 18, and the volume is 1 500 − 60 × 21 = 240 boxes. For B in the same way: 450 − 7.5 × P = 30 × (P − 3) − 300, i.e. 37.5 × P = 840 and P = 22.4.

Had the law made the buyer pay the levy, in market A the seller would have received 18 thousand soums and the buyer would have spent 21 thousand soums in total: exactly the same result.

The practical conclusion for the seller: before saying "we'll add it all to the price" when costs rise, assess how many alternatives buyers have. For product A, raising the price by the full 3 000 soums would cut sales even further.