Answer to Question #271628 in Microeconomics for Mahesh

Question

how does the government use concepts of elasticity while deciding which goods to tax and how those decisions impact the government revenue

Answer 1

The concept of price elasticity of demand is critical in the formulation of government policies, particularly tax policies. Higher taxes can be placed on goods with inelastic demand, while low tax rates can be levied on commodities with elastic demand. The tax rate is determined by the supply and demand price elasticity. Buyers bear the majority of the tax burden when supply is more elastic than demand, while producers suffer the majority of the tax burden when demand is more elastic than supply. The more inelastic demand and supply are, the higher the tax revenue.