Question

Consider a tax place on a good with elastic demand

a.) Who will pay most of the tax: consumets or producers?

b.) Will the tax raise a lot to revenue or little revenue for the government?

c.) Will the tax create a large of little deadweight loss?

Answer 1

A) WHEN A TAX IS IMPOSED ON A GOOD WITH ELASTIC DEMAND, THE PRODUCER WILL PAY MOST OF THE TAX. BECAUSE,QUANTITY DEMANDED VARIES MORE WITH PRICE CHANGE.

B) A TAX ON A GOOD WITH ELASTIC DEMAND IS NOT EFFECTIVE FOR RAISING REVENUE FOR THE GOVERNMENT. ELASTIC DEMAND MEANS A SMALL CHANGE IN PRICE LEADS TO MORE THAN PROPORTIONATE CHANGE IN QUANTITY DEMANDED. SO TAXATION WILL NOT GENERATE MORE REVENUE.

C) HERE WITH ELASTIC DEMAND, DEAD WEIGHT LOSS INCREASE WITH TAXATION.

THERE IS A POSITIVE RELATION BETWEEN ELASTICITY AND DEAD WEIGHT LOSS OF TAXATION. HIGHER THE ELASTICITY OF DEMAND ,THE HIGHER WILL BE THE DEAD WEIGHT LOSS OF TAXATION.