Question

Comment on the following statement: “Imposing a tax on a product whose demand is inelastic is good on efficiency grounds, but bad on equity grounds.” ?

Answer 1

Price inelastic goods are generally those goods which are considered as essential for the consumptions, that is the reason why the demand for those goods doesn't change with a change in the price. Example for such goods is Salt, petrol etc.

When taxes are increased on such goods the amount of goods traded are not reduced much, that is the reason the deadweight loss is less, having very less effect on the efficiency of the market. But when such goods are taxed the poor consumers have to pay a high amount to consume those good. Because these goods are essential poor consumers lose a large amount of their budget on these products and they can't consume more of other goods. Increasing inequality in the economy.