Answer to Question #81499 in Microeconomics for somvir

Question

the government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: palm wine and diapers. If the price elasticity of demand for the goods are -0.47 and -1.89 respectively, which good should it tax if the goal is to raise revenue? If the government wants to tax only one good, which good should it tax if the goal is to discourage consumption? Explain your answer with the help of diagram.

Answer 1

If the price elasticity of demand for palm wine and diapers are -0.47 and -1.89 respectively, then the government should tax the good with inelastic demand if the goal is to raise revenue, so it will tax palm wine.
If the goal is to discourage consumption, then the government should tax the good with elastic demand, so it will tax diapers.