question archive If a government wants to raise as much revenue as possible with a sales tax, it should target a market with: A
If a government wants to raise as much revenue as possible with a sales tax, it should target a market with: A
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If a government wants to raise as much revenue as possible with a sales tax, it should target a market with:
A. high price elasticity of demand and high price elasticity of supply.
B. low price elasticity of demand and high price elasticity of supply.
C. high price elasticity of demand and the low price elasticity of supply.
D. low price elasticity of demand and the low price elasticity of supply
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- The correct answer is: B). low price elasticity of demand and high price elasticity of supply.
If a government wants to raise as much revenue as possible with a sales tax, it should target a market with low price elasticity of demand and high price elasticity of supply. A low price elasticity of demand (that is, price inelastic) is less responsive to an increase in price, while , on the other hand, high price elasticity of supply (that is, supply is elastic) is more responsive to an increase in price. Therefore, the imposition of a sales tax on a good with inelastic demand and elastic supply will lead to greater tax revenue for the government.
