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Suppose you are chair person of a state tax commission that is responsible for establishing a...

Suppose you are chair person of a state tax commission that is responsible for establishing a program to raise new revenue through the use of excise taxes.

    Would elasticity of demand be important to you in determining those products upon which excise taxes should be levied? Explain.

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Answer #1

Yes. It is important to have an idea of the elasticity of demand. Markets where demand elasticity is less than 1, are considered favorable for raising the tax collection. This is because when the tax raises the price of the good by a given percentage, the resultant decline in sales in percentage terms, is relatively less, which implies that the revenue should increase. Hence excise taxes should be levied on goods with inelastic demand so that higher price results in higher revenue.

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