Question

Good weather results in oversupply which forces down price, and results in lower profit margins. That is bad for the farmer. Bad weather results in lower quantities of product to be sold which reduces total sales revenues. That is also bad for the farmer. The reason why lower supply from bad weather is bad is because not having enough to sell translates into lower total revenue even though the price per tonne might be higher. This means that even though he will get a higher profit MARGIN (selling price minus cost per unit sold), his total revenue from sales is lower. Why do you think the government always target consumption products like tobacco, alcohol and gasoline to increase tax revenues? What is the economic logic behind targeting these goods? What don’t they tax wheat as much?

Answer 1

Government aims to increase tax revenue by taxing those goods which have inelastic demand. When demand is inelastic, a given increase in the good's price (caused by imposition of tax) leads to a less-than proportionate decrease in quantity demanded, therefore total revenue for government increases and deadweight loss from the tax is lower, compared to elastic goods. Since tobacco, alcohol and gasoline are inelastic goods (tobacco and alcohol being addictive goods, and gasoline having few substitutes), government imposes tax on these goods. On the other hand, wheat being a staple good, has an elastic demand and imposition of tax on wheat will decrease its quantity demanded more-than proportionately, lowering tax revenue and increasing deadweight loss. So wheat is not taxed much.