Question

You have been hired as an economic consultant to the mayor. He is considering putting a tax on several products. You are worried about the impact of deadweight loss on the market for these products.

You tell the mayor that the deadweight loss will be lower when:

a. supply is inelastic and demand is elastic.
b. supply is inelastic and demand is inelastic.
c. supply is elastic and demand is elastic.
d. supply is elastic and demand is inelastic

Answer 1

d. supply is elastic and demand is inelastic

Step-by-step explanation:

Deadweight loss is loss in efficiency as a result of tax.

Deadweight loss is when the quantity demanded or supplied falls as a result of tax. When tax is imposed on a good or service, the price of purchasing it increases which discourages purchase. If tax is imposed on production of a good or service, producing the good becomes expensive and production falls.

Demand is inelastic if a change in price has little effect on quantity demanded.

Supply is inelastic if a change in price has little effect on the quantity supplied.

If tax is imposed on a good with either inelastic supply or demand, deadweight loss would be low.

I hope my answer helps you