Final answer:
Tax incidence is the division of the burden of a tax between consumers and producers, determined by the elasticity of demand and supply. In the case of cigarette taxes, the inelastic demand leads to consumers bearing the majority of the tax burden.
Step-by-step explanation:
Tax incidence refers to the analysis or manner in which the burden of a tax is divided between consumers and producers. This division is dependent on the elasticity of demand and supply within a market. For instance, in the case of cigarette taxes, it was observed that because the demand for cigarettes is inelastic, the taxes levied are not effective at reducing the equilibrium quantity of smoking. Instead, these taxes are mainly passed along to consumers in the form of higher prices, showing that the tax burden mainly falls on consumers rather than producers.
When considering elasticity and tax incidence, an important takeaway is that the group (consumers or producers) associated with the more inelastic curve, whether it be demand or supply, will bear a larger portion of the tax burden. This concept can also be used to predict the potential revenue generation from a tax. Highly elastic markets will generate low revenue from excise taxes, due to significant alterations in the quantity demanded or supplied in response to tax-induced price changes.