Topic 1: Price Elasticity of Demand and Government Revenue
Based on the assessments of price elasticity of demand, some goods are demand-elastic whereas others are demand inelastic. Our consumption pattern also depends on the income elasticity of demand, which shows the relationship between the change in our income and quantity demanded.
When a government wants to increase tax revenue, they will often increase the sales tax on gasoline. Using price elasticity of demand, explain why the tax would be placed on gasoline rather than, say, yachts.
A. What might be the long run effect of raising the price of gas?
B. Who is harmed by the tax? Who benefits from such a tax?
C. Are low-income households disproportionately harmed as compared to high-income households? Why?