The deadweight loss from a tax of $2 per unit will be smallest in a market with
A)inelastic supply and elastic demand.
B)inelastic supply and inelastic demand.
C)elastic supply and elastic demand.
D)elastic supply and inelastic demand.

Question

Quizplus · Accepted Answer

The deadweight loss from a tax is minimum when either the demand or the supply is inelastic. In the case of inelastic demand and inelastic supply, both parties are less responsive to price changes, and hence the quantity demanded and supplied will not change much with the imposition of the tax. Therefore, the deadweight loss will be minimum in such a situation.

The Deadweight Loss from a Tax of $2 Per Unit