Question

) Assume that when the government increases the sales tax on a good the price of the good increases. If the government wanted to increase revenues by increasing the sales tax, would the government increase the sales tax on a good which is price elastic or which is price inelastic? Please explain.

Answer 1

A good is price inelastic when the demand for the goods will not change much if the price of that goods increased, elastic goods will be when the demand for the goods changes a lot as compared to change in the price.

If the government is charging tax on the goods that are elastic then a change in the price will reduce the demand for the goods and that will reduce the revenue collection, on the other hand, if the tax is applied on the goods where the demand is inelastic then the demand will not change much with an increase in the price and government can get a higher revenue.