Final answer:
The deadweight loss from a tax is likely to be smallest when the tax is imposed on a good with inelastic demand. When demand is more inelastic than supply, consumers bear most of the tax burden, as they are not very responsive to price changes. This leads to higher prices without a significant decline in the equilibrium quantity.
Step-by-step explanation:
The deadweight loss from a tax is likely to be smallest when the tax is imposed on a good with inelastic demand.
When demand is more inelastic than supply, consumers bear most of the tax burden. In this case, the quantity demanded reduces only modestly when the tax is introduced since consumers are not very responsive to price changes. Therefore, the government can pass the tax burden along to consumers in the form of higher prices, without much of a decline in the equilibrium quantity. On the other hand, if the tax is imposed on a good with elastic demand, the tax burden on consumers would be smaller as they would reduce the quantity demanded more significantly in response to higher prices.
For example, let's consider two goods: luxury cars and bread. Luxury cars are often considered a luxury good, which means that their demand is elastic. If a tax is imposed on luxury cars, consumers would be more likely to reduce the quantity demanded significantly due to the higher prices resulting from the tax. On the other hand, bread is typically considered a necessity good, and its demand tends to be more inelastic. If a tax is imposed on bread, consumers would be less likely to significantly reduce the quantity demanded in response to higher prices, resulting in a smaller deadweight loss from the tax.
Therefore, option 4) The tax is imposed on a good with inelastic demand is likely to result in the smallest deadweight loss from a tax.