Other things equal, for a given tax, if the demand curve is more elastic,
A)the greater the tax revenue raised and the greater the deadweight cost of the tax.
B)the greater the tax revenue raised and the smaller the deadweight cost of the tax.
C)the less the tax revenue raised and the greater the deadweight cost of the tax.
D)the less the tax revenue raised and the smaller the deadweight cost of the tax.

Question

Other things equal, for a given tax, if the demand curve is more elastic,
A)​the greater the tax revenue raised and the greater the deadweight cost of the tax.
B)​the greater the tax revenue raised and the smaller the deadweight cost of the tax.
C)​the less the tax revenue raised and the greater the deadweight cost of the tax.
D)​the less the tax revenue raised and the smaller the deadweight cost of the tax.

Quizplus · Accepted Answer

When the demand curve is more elastic, consumers are more sensitive to changes in price. As a result, a tax will cause a larger decrease in quantity demanded, leading to a smaller increase in tax revenue. However, the deadweight cost of the tax (i.e., the loss in consumer and producer surplus beyond the revenue raised by the government) will be higher because consumers will be more likely to switch to substitute goods or services. Therefore, a more elastic demand curve results in less tax revenue raised and greater deadweight cost.

Other Things Equal, for a Given Tax, If the Demand