Answer to Question #174931 in Microeconomics for John

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

As the Minister of Finance I would tax the good with low price elasticity of demand to increase tax revenue.This is because tax revenue is larger the more supply and demand are inelastic. In inelastic demand the consumer buying habits are not affected by change in prices and by taxing the good, it's demand wouldn't change.