Tax wedge

Deviation from equilibrium price and quantity

The tax wedge is the deviation from the equilibrium price and quantity as a result of the taxation of a good. Because of the tax, consumers pay more for the good than they did before the tax, and suppliers receive less for the good than they did before the tax. Put differently, the tax wedge is the difference between the price consumers pay and the value producers receive from a transaction. The tax effectively drives a "wedge" between the price consumers pay and the price producers receive for a product.

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