Question

When using a per-unit tax, the most efficient way of collecting tax revenue is to: a) tax a relatively inelastic supply. b) tax a relatively elastic demand. c) tax those who would greatly change their production after a change in the price of a good. d) tax those who would greatly change their consumption after a change in the price of a good.

Answer 1

The answer is Option (a): Per unit tax means taxing a fixed amount for each unit of good or services sold. Hence, a relatively inelastic supply is not affected by taxes as the supplies are necessity items and the consumption will not be effected.

Option (b) is wrong as an elastic demand means consumption can decrease with increase in tax.

Option (c) is incorrect because production can greatly change both ways and for tax revenue, a decrease in supply is not desirable.

Option (d) is incorrect as here also the consumption changes with change in price of goods which will not fulfil the goal of maximizing tax revenue collection.