Question

After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic.
A tax on food leads to larger deadweight loss than a tax on goods with more elastic demand.

a. True
b. False

Answer 1

Answer:

The correct answer is letter "B": False.

Explanation:

Deadweight Loss is a term used in economics that explains the loss to society as a result of market inefficiencies. When supply and demand are out of equilibrium, markets are inefficient. Often, government policies can cause deadweight loss.

Taxes generate deadweight loss because the total price of a product, which includes tax, may be higher than the price that customers are willing to pay. Thus, a tax on goods with elastic demand is likely to create more deadweight loss that taxes on foods with regular demand.