Final answer:
The area of tax incidence on a graph can be determined by the shaded area which shows the tax revenue, while the differences between prices before and after tax show the burden on consumers and sellers. Elasticity plays a key role in determining who bears the majority of the tax burden.
Step-by-step explanation:
The area of tax incidence can be determined from a graph by looking at how the imposition of a tax shifts the supply and demand curves and changes the equilibrium price and quantity. The tax revenue is illustrated as a shaded area on the graph, calculated by multiplying the tax rate per unit by the total quantity sold (Qt). To calculate the tax incidence on consumers, we examine the difference between the price consumers end up paying (Pc) and the initial equilibrium price (Pe). Conversely, the tax incidence on sellers is represented by the difference between the initial equilibrium price (Pe) and the price they receive post-tax (Pp).
In scenarios such as the taxation of tobacco products, if the demand is inelastic relative to supply, consumers will bear a greater burden of the tax. This is shown on the graph by a large difference between Pc and Pe. Elasticity of demand and supply are essential in determining who will shoulder the majority of the tax burden and can also help predict the likely tax revenue generated from such taxes.