Definition
- Tax wedge
- The tax wedge is the gap a tax opens between the price consumers pay and the price producers receive, equal to the tax per unit.
- Not to be confused with: Tax incidence
- Tax incidence is the way the burden of a tax is divided between the consumers and the producers of the taxed good.
Test yourself
What is the difference between tax wedge and tax incidence?
Incidence is who ends up bearing the tax; the wedge is the size of the gap the tax opens between the two prices.