Answer to Question #267915 in Microeconomics for dodo

Question

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? Explain.

Answer 1

Correct answer cigarettes :

The relative price elasticity of supply and demand determines the tax incidence. Buyers absorb the majority of the tax burden when supply is more elastic than demand. Producers carry the majority of the tax burden when demand is more elastic than supply. The less elastic demand and supply are, the higher the tax income.