If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, they should look for goods with _________ elasticities of demand and _________ elasticities of supply. (Fill in the blanks.)

Question

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, they should look for goods with _________ elasticities of demand and _________ elasticities of supply. (Fill in the blanks.)

BlackTom AI · Accepted Answer

The question asks about choosing goods to tax in a way that raises revenue while minimizing deadweight losses, focusing on the elasticities of demand and supply.
Option A: 'small, small' — When both demand and supply are inelastic (small elasticities), the quantity traded changes little in response to a tax, so the deadweight loss is minimized relative to other combinations. This option aligns with the standard result that DWL decreases as elasticities fall.
Option B: 'small, large' — Here demand is inelastic but supply is elastic. The tax reduces quantity, but the large elasticity of supply means producers can adjust output more, potentially widening the wedge between price received and price paid and increasing DWL compared with the inelastic–inelastic case. The tax burden may shift, yet the deadweight loss is not minimized due to the elastic side.
Option C: 'large, small' — With elastic demand and inelastic supply, buyers reduce quantity substantially in response to the tax, creating a larger distortion in the market and a larger DWL than when both sides are inelastic. The high sensitivity of demand exacerbates welfare loss.
Option D: 'large, large' — When both sides are highly elastic, the quantity change in response to a tax is substantial, producing the largest deadweight loss among these scenarios. This option represents the least favorable condition for minimizing DWL.
In summary, the pattern is that smaller elasticities (more inelastic demand and supply) minimize deadweight loss from taxation, whereas larger elasticities amplify DWL. The options progress from least to most DWL potential depending on the elasticity combinations, with the inelastic–inelastic pair generally yielding the smallest loss.

ECON 1101 In-Class Activity 4 (Lectures): Government Policies and Efficiency of Market Outcomes

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, they should look for goods with _ elasticities of demand and _ elasticities of supply. (Fill in the blanks.)

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