Question

Suppose the canadian government decides that it needs to raise an additional $100 million in tax revenues. one cabinet minister argues for a tax on all soft drinks. a second cabinet minister argues for a tax on cola only, since this would give consumers a choice of paying the tax (by drinking cola) or avoiding it (by switching to another soft drink)

Answer 1

The market for cola would have more elastic supply and demand curves because consumers will have access to alternative substitutes if the price of cola changes. The tax rate would have to be higher for those goods that have elastic supply and demand curves, such as cola. A marginal increase in the tax rate on all soft drinks will yield a higher tax review for government as consumers and producers are less responsive to price changes. The deadweight loss of a tax would be greater, the greater the elasticities of supply and demand, in this case, a tax on cola. From a government’s point of view, the better tax would be the one placed on the market for all soft drinks if this market faces inelastic demand and supply curves.