Governor Brown, from the state of Taxifornia, wants to increase sales taxes to b
ID: 1195305 • Letter: G
Question
Governor Brown, from the state of Taxifornia, wants to increase sales taxes to bring in badly needed revenue to support state operations. He is looking at taxing various goods and services. Will the state tax revenue be greater if the state imposes a sales tax on goods where the price elasticity of demand = .9, or 1.5 ? Explain Governor Brown, from the state of Taxifornia, wants to increase sales taxes to bring in badly needed revenue to support state operations. He is looking at taxing various goods and services. Will the state tax revenue be greater if the state imposes a sales tax on goods where the price elasticity of demand = .9, or 1.5 ? ExplainExplanation / Answer
Elasticity is given by % change in quantity demanded/% change in price.
The revenue from sales tax will be greater in case they tax the good with elasticity of 0.9.
An elasticity value of less than 1 implies inelasticity of the demand of the good. This means that a change in price will bring less than proportionate change in demand. So when a tax is imposed, the price of the commodity rises. With inelastic demand, the fall in demand is less than proportionate rise in price, increasing the total revenue, which is price times quantity, on the whole.
On the contrary, elasticity value of greater than 1 implies elastic demand. That means, a change in price will lead to more than proportionate change in quantity demanded. So by imposing a tax, when price increase, the demand will fall by much extend, decreasing the revenue on the whole.
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