Let’s take a look at the supply side of junk food. If junk food supply is highly elastic—perhaps because it’s not that hard to start selling salads with lowfat dressing instead of mayonnaise- and cheese-laden burgers—will a junk food tax have a bigger effect if supply were inelastic or elastic?

Question

BlackTom AI · Accepted Answer

The question asks about the relative impact of a junk food tax depending on how elastic the supply is.
First, recall what supply elasticity means: when supply is elastic, producers can noticeably adjust the quantity supplied in response to price changes; when supply is inelastic, quantity supplied changes only a little with price.
Option: elastic. If supply is highly elastic, a tax induces a larger quantity reduction because producers can cut back output more readily in response to the higher after-tax price they effectively receive. This tends to amplify the tax’s effects on market quantity and creates a larger deadweight loss compared with a given tax when supply is inelastic.
Option: (implicit alternative) inelastic. With inelastic supply, producers cannot or will not adjust quantity much when the price changes due to the tax, so the quantity effect is smaller and the overall distortion (deadweight loss) from the tax tends to be smaller.
In short, higher elasticity on the supply side means the tax will generate a larger behavioral response (more quantity change) and a larger distortion in the market, whereas lower elasticity dampens the response. Therefore, the bigger effect occurs when supply is elastic.

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

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