Final answer:
The deadweight loss from a tax on corn used for ethanol is greater if corn is a necessity with few substitutes, because demand and supply will be more inelastic, leading to a larger deadweight loss when the market is less flexible in response to taxes. Option a is the Correct Answer.
Step-by-step explanation:
The deadweight loss from a tax on corn used in the production of ethanol will likely be greater if corn is a necessity rather than a luxury because the demand and supply will be more inelastic.
When demand or supply is inelastic, a tax does not greatly affect the equilibrium quantity, but it does impose a larger burden on one side of the market and can lead to a greater deadweight loss. On the other hand, when buyers and sellers have more time to adjust to the tax, demand and supply tend to be more elastic, because economic agents can find alternatives or change their consumption or production habits, leading to a smaller deadweight loss.
If corn has few close substitutes, demand is typically more inelastic, as there are fewer alternatives available to cushion the effects of the tax, which again, can lead to a greater deadweight loss. Therefore, deadweight loss is linked to the elasticity of demand and supply, which varies depending on the time frame given to adjust and the availability of substitutes for the taxed good.