Option 1. Tax is paid by the seller to the government and is, therefore, like a cost of production.
Since sellers have to pay tax to the government, it decreases the effective price received by the seller (= post-tax equilibrium price - Unit tax), so sellers produce less, decreasing market supply.
Tax incidence is the manner in which the tax burden is divided between buyers and sellers. The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden.
When a tax is imposed on the buyers of a good, the demand curve shifts downwards with respect to the amount of tax imposed, thus causing the equilibrium price and quantity of commodities demanded to reduce.
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