Question

If a policy maker wants to raise tax revenue while minimizing the deadweight loss, he should look for goods with ……………..elasticities of demand and …………………elasticities of supply.

A. small, small

B. small, large

C. large, small

D. large, large

Answer 1

Hi there, Thank you for asking this question.

The answer for your question is option (A) Small, Small.

Having smaller elasticity of demand and supply will make the demand and supply curves flatter and thus makes the deadweight loss to the minimum. Deadweight loss on taxation is small and it largely depends on elasticity of demand and supply. It increases or decreases proportionately to the elasticity of demand and supply. Having inelastic demand and supply can increase the deadweight loss and vice-versa. Higher tax rates can increase the deadweight loss, but it comes at a higher expense to the economy.