Question

Suppose the government wants to minimize the deadweight loss associated with an excise tax. Sort the following goods into their correct category based on the size of the deadweight loss that will be created after the imposition of an excise tax. Drag and drop into the appropriate area below Fur Coat Gasoline Phone Service Cauliflower Cigarrettes

Answer 1

Large dead weight loss - Fur coat, Cauliflower

Small dead weight loss - Gasoline, Phone Service, Cigarettes

Step-by-step explanation:

The deadweight loss is the loss of social welfare. It is a reduction in economic surplus due to the imposition of tax.

The imposition of a tax causes the price of the product to increase. This increase in price decreases the quantity demanded this creates a deadweight loss as profit to producer and utility to consumer gets reduced.

Higher price elasticity implies that an increase in price would reduce the quantity demanded to a greater extent so the deadweight loss will also be higher. Similarly, smaller price elasticity implies smaller deadweight loss.

The demand for gasoline, cigarettes, and phone service will have smaller price elasticity as they are essential commodities. The fur coat is a luxury good, so it will have a higher price elasticity. Cauliflower will also have a higher price elasticity as consumers will prefer a cheaper substitute.