Question

Suppose the government is attempting to discourage consumption of two goods: good X and good Y. Good X has a very elastic demand and good Y has a very inelastic demand. The government plans to implement a tax on the suppliers of both goods. If the elasticity of supply for both goods is perfectly elastic, which tax will be more effective at reducing consumption and why?

Answer 1

Solution:

With a perfectly elastic supply curve, the entire tax burden falls on the consumers. Now with a relatively inelastic curve, they bear more tax burden, and the quantity doesn't change by too much as it suggests (inelasticity means even with huge change in price, quantity doesn't change too much).

Then, as the demand curve for good Y is very inelastic, while demand curve for good X is very elsatic, with tax imposition, quantity demanded will change less for good Y, while too highly for good X. In other words, tax would be more effective in reducing consumption in case of good X.