Answer to Question #172821 in Microeconomics for celine

Question

Assume you are the Minister of Finance and you need to raise revenue by taxing a specific good. Would you tax a good with high price elasticity of demand or one with low price elasticity of demand? Explain

Answer 1

Let's assume there're two goods: A(high elasticity of demand) and B(low price elasticity of demand).

If the tax is going to be imposed on good A then the price of A will rise => the demand of A will fall => people are going to purchase less of the good A which means that the government will get less tax revenue

A tax imposed on good B will bring more tax revenue because the price rise will cause less changes in demand and quantity purchased

Answer: tax a good with low price elasticity