Answer to Question #271635 in Macroeconomics for Mahesh

Question

how does the government use concepts of elasticity while deciding which goods to tax and how those decisions impact the government revenue

Answer 1

The concept of price elasticity of demand is important for formulating government policies, especially policies on taxation. It imposes higher taxes on goods with inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic demand. For the price inelastic goods, it causes an increase in government revenues since despite the level of taxes, consumers still buy the good as compared to price elastic goods which reduces government revenue.