Watch the following video on how elasticity affect the incidence of taxation and answer the question below:

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

Question

Watch the following video on how elasticity affect the incidence of taxation and answer the question below:

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

BlackTom AI · Accepted Answer

To evaluate how a tax on junk food affects consumption, we need to consider how responsive buyers are to price changes.
Option 1: Inelastic. If demand is inelastic, consumers hardly change the quantity they buy when price rises. A tax would raise prices and mostly be borne by consumers in the form of higher spending, while quantities sold drop only slightly. This means the tax would fail to deter consumption effectively, which makes this option incorrect for the goal of deterring junk food eating.
Option 2: Elastic. When demand is elastic, consumers are sensitive to price changes and will significantly reduce their purchases when the price increases due to the tax. The larger the drop in quantity demanded, the more effective the tax is at deterring consumption. This aligns with the stated goal and makes this option the correct one.
Option 3: Indeterminate. Saying the effect is indeterminate would ignore the core concept of price elasticity: the degree of responsiveness of quantity demanded to price changes varies by the product and the consumers. While in some unusual cases elasticity could be unclear, the standard expectation for deterring consumption through a tax relies on elastic demand to be effective, so this option is not appropriate here.

ECON&201 15109 Elasticity and Taxation - Who pays the tax?

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