Question

The price elasticities of supply and demand affect A. the tax incidence but not the size of the deadweight loss from a tax. B. both the size of the deadweight loss from a tax and the tax incidence. C. the size of the deadweight loss from a tax but not the tax incidence. D. neither the size of the deadweight loss from a tax nor the tax incidence.

Answer 1

Answer:

B. both the size of the deadweight loss from a tax and the tax incidence

Explanation:

The price elasticities of demand & supply are : buyers' & sellers' - demand & supply responsiveness to price change.

On levy of indirect tax - whose burden can be shared between buyers & sellers ; it affects tax incidence & deadweight loss both :-

• More tax burden shifts on buyers if demand is more inelastic, more tax burden shifts on sellers if supply is more inelastic.
• Deadweight loss is the effect of tax re allocation,  benefitting neither of consumer surplus, producer surplus, government revenue. It is less when demand &, or supply are more inelastic