Why a tax lands on whoever can't walk away: tax incidence and the wedge
30seconds
The law decides who hands over the money for a tax, but not who ends up poorer. Put a tax on a market and two prices appear: what the buyer pays and what the seller keeps. How the gap splits depends on who finds it easier to walk away.
Drag the tax, change each side's escape routes and flip who the law blames. The split never moves, and the lost trades grow with the square of the tax.
Deep dive · 5 min
More in Economics
View all →
Why fair coin flips end with one person owning almost everything: the yard-sale model of wealth
Give 60 people 100 coins each and let them trade by fair coin flips, with the stake a fixed share of the poorer person's wealth. Nobody has any skill or…
Why a healthy bank can still collapse: Diamond and Dybvig's bank run
A bank keeps only a slice of your deposit as cash and lends the rest for years, so it quietly bets that almost nobody asks for their money at once. Diamond and…
Why a country that's worse at everything still gains from trade: Ricardo's comparative advantage
How can a country that is worse at everything still gain from trade? Ricardo's 1817 England-and-Portugal example says the answer is not who is faster, but what…
Why two ice-cream vendors end up side by side: Hotelling's beach
Two ice-cream vendors share a long beach, and every swimmer walks to the nearer cart. Where should each one park? Drag the carts and watch the dividing line…
Why a free shortcut can make everyone's commute longer: Braess's paradox
Build a brand-new road and every commute gets longer. In a town of 4,000 drivers, two routes each take 65 minutes. Add a free shortcut and each driver…
Why the auction winner so often overpays: the winner's curse
Why does the winner of an auction so often go home poorer? When a prize is worth the same to everyone, each bidder only has a noisy estimate, and winning means…