Tax wedge

The tax wedge is the deviation from the equilibrium price/quantity (${\displaystyle P^{*}}$ and ${\displaystyle Q^{*}}$, respectively) as a result of the taxation of a good. Because of the tax, consumers pay more for the good (${\displaystyle P_{c}}$) than they did before the tax, and suppliers receive less for the good (${\displaystyle P_{s}}$) than they did before the tax . Put differently, the tax wedge is the difference between what consumers pay and what producers receive (net of tax) 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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