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The government of Bassaland is looking for new revenue sources. It is considering imposing an excise...

The government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: palm wine and diapers. If the price elasticity of demand for the goods are -0.47 and -1.89 respectively, which good should it tax if the goal is to raise revenue? Explain your answer.

If the government wants to tax only one good, which good should it tax if the goal is to discourage consumption? Explain your answer.

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Answer #1

If the government wants to raise revenue then it should tax palm wine because the demand for palm wine is inelastic meaning changes in price will not lead to larger Changes in quantity so the total revenue will increase on increasing its price.

If the goal is to discourage consumption the government should tax diapers because the demand for diapers is elastic meaning changes in prices of diapers will lead to Larger Changes in quantity. So if the government puts tax on diapers the price will increase and demand for diapers will decrease

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