Question

You are a policy maker who is interested in increasing tax revenues in order to reduce the Federal budget deficit. One proposal that has been suggested is to increase excise taxes on certain goods. Some of the options suggested are: vacation travel such as cruises liquor and cigarettes gasoline theater and concert tickets Based on your knowledge of elasticity of demand, which items would you choose? Explain.

Answer 1

Answer is given below:

Step-by-step explanation:

• Excursions like vacations are usually in high demand because they are luxury items. When tax is levied on holiday travel the price increases but the income decreases due to the elastic demand.
• Alcohol and cigarettes, gasoline are generally in short supply. When these goods are taxed, value addition is expected to increase revenue as there is unqualified demand.
• With regard to theater tickets, concert ticket prices are usually higher because demand is very unreasonable. Therefore the tax revenue levied on concert tickets should be increased