Grit-Builder: Incidence of a tax .... a problem with a shift in the supply curve. This question is designed to help you understand some of the implications of taxation. Often, policymakers argue that a tax should be imposed on firms since 'they are in a better position to pay the tax'. This thinking, however, is misguided since the burden of the tax will fall on both consumers and producers alike. Only in very rare cases will the full burden of the tax fall only on the entity (firms or consumers) that it is levied on. For example, if a government imposes a $10 tax on firms, and, as a result, prices rise by $8, firms effectively pay only 20% of the tax - consumers, facing a higher price, will pay the other 80%. This (the 20% and the 80%) is what is referred to as the incidence of the tax burden. Who pays what percentage depends critically on which curve - the demand curve or the supply curve - is more inelastic. Recall, the more inelastic the curve is, the less responsive will quantity demanded or supplied be to a change in price. As a result, the more inelastic the