Question

The demand for mint chip ice cream is more elastic than the demand for candy. Suppose the government levies an equivalent tax on mint chip ice cream and candy. The deadweight loss would be larger in the market for

mint chip ice cream than in the market for candy because the quantity of mint chip ice cream would fall by more than the quantity of candy.

candy than in the market for mint chip ice cream because the quantity of candy would fall by more than the quantity of mint chip ice cream.

mint chip ice cream than in the market for candy because the quantity of candy would fall by more than the quantity of mint chip ice cream.

candy than in the market for mint chip ice cream because the quantity of mint chip ice cream would fall by more than the quantity of candy.

Answer 1

The deadweight loss would be larger in the market for mint chip ice cream than in the market for candy due to the more elastic demand for ice cream leading to a greater reduction in quantity demanded when a tax is applied.

Step-by-step explanation:

When we consider the impact of taxes on different markets, it is essential to understand the concept of elasticity. In this scenario, elastic demand for mint chip ice cream means consumers will significantly reduce their quantity demanded in response to a price increase, as opposed to candy which has a more inelastic demand where consumers are less responsive to price changes.

As a result, when a tax is imposed on both goods, the market for mint chip ice cream will experience a larger deadweight loss than the market for candy. This is because the quantity of mint chip ice cream demanded will fall more drastically as consumers switch to other alternatives, while the quantity of candy demanded will not reduce as significantly due to its inelastic nature.