Answer to Question #161638 in Microeconomics for ray

Question

what is the effect on tax revenue if the government increases the excise tax on a product that has an elastic demand?

Answer 1

If the government increases the excise tax on a product that has an elastic demand, it results in shift of the supply curve to the left, higher price and larger fall in demand compare to inelastic demand. Due to the larger fall in demand, the tax revenue will be smaller than in case of inelastic demand.