Question

You are appointed finance minister in Moldavia and have been asked by the prime minister to give her tax policy advice.  Which of the following statements would you include in your briefing? I. Broaden the tax base to minimize deadweight loss (DWL). II. Assuming supply schedules all share the same price elasticity, tax goods with more elastic demand more than goods with less elastic demand. III. Regardless of the price elasticity of supply in different markets, tax goods with less elastic demand more than goods with more elastic demand. Group of answer choices

II only

I and III only

I only

I and II only

Answer 1

I and III only

second statement is not correct because if we tax those goods and services that have greater elasticity of demand then we are going to generate very little revenue. This is because price responsiveness is very high and there will be a greater decline in sales and there will be less revenue generated. In order to collect more revenue from taxes those goods and services should be taxed that have relatively less elastic demand. Also know that deadweight loss depends upon the size of the tax and tax base. If there is an increase in the tax base then and there will be a reduction in the deadweight loss.