Question

A tax targeted to reduce consumption of a good by a specific quantity will raise the most revenue when:


A. both supply and demand are inelastic.


B. supply is inelastic and demand is elastic.


C. supply is elastic and demand is inelastic.


D. both supply and demand are elastic.

Answer 1

Answer:

The correct answer is option A.

Explanation:

The imposition of tax creates a tax wedge. The price paid by buyers increases and price received by sellers decreases. This causes the equilibrium quantity of products to decrease.

Though, the change in quantity depends upon the elasticity of demand and supply. If both demands are inelastic and the increase in price will cause the quantity demanded to decrease less than proportionate.  

If the supply is inelastic, a decrease in price will cause less than a proportionate decline in quantity supplied.

So when both the supply as well as demand is inelastic, the tax revenue will be the most.

Answer 2

At the time when the consumption is decreased so here, the supply and demand should be non-elastic. Option A.

Imposition of tax:

It developed the tax wedge. The price paid by buyers should be increases and price received by sellers should be decreases. Due to this, the equilibrium quantity of products decreases. In the case when the supply is inelastic, so a reduction in price will lea less compared to a proportionate fall in quantity supplied.

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