Answer to Question #267089 in Microeconomics for Mario

Question #267089

Assume you are the Minister of Finance and need to raise revenue by choosing to tax a specific good, such as cigarettes or jewellery. Suppose that cigarettes have an inelastic demand, while jewellery has an elastic demand. Based on their elasticity, would you tax jewellery or cigarettes?


1
Expert's answer
2021-11-16T13:36:58-0500

Answer: cigarettes

The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.



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