Question

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?

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

50 words minimum.

Answer 1

The price elasticity of demand for palm wine is -0.47.

The price elasticity of demand for diapers is -1.89

The value of the price elasticity of demand for palm wine is less than 1. This means demand for palm wine is inelastic.

The value of the price elasticity of demand for diapers is greater than 1. This means demand for diapers is elastic.

An imposition of excise tax would lead to increase in price of both goods.

As demand for palm wine is less elastic than demand for diapers, the proportionate change in quantity demaned would be less for palm wine relative to diapers.

This will result in greater tax revenue collection from palm wine.

Thus,

Palm wine should be taxed if the goal is to raise revenue.

Government would definitely want to reduce the consumption of alcoholic drinks. Palm wine is an alcoholic drink.

So,

Government should tax palm wine if the goal is to discourage consumption.