In Thailand, researchers have found that the price elasticities for food, alcoho

Question

In Thailand, researchers have found that the price elasticities for food, alcohol, and telecommunications are -.10, -.84, and -.025, respectively.

a. If the goal is to raise tax revenues with the least excess burden possible, what should should be the tax rate on alcohol and telecommunications, when the tax rate on food is fixed at 1% (assuming that the goods are unrelated in consump- tion)? Explain your answer.

b. Now if the government wants to combat alcohol addiction, how would your answer to (a) change?

Explanation / Answer

a)Originally the elasticity of alcohol is relatively elastic so they should keep the taxes on alcohol to raise more revenue from its sales and the taxes on food is kept fixed because they are unrelated in their consumption the lower taxes will keep its demand higher and increase sales .

b)When government wants to combat alcohol consumption they raise taxes exorbitantly so that people fall at lower section of the laffer curve .Now the demand for the alcohol will be more elasticc than before reducing their welfare from high taxes leading to a fall in sales for alchol .

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