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.Which of the following statements are true? Check all that apply.Taxing food will generate a large amount of deadweight loss because people aren't very price sensitive in this market.Taxing food won't generate any tax revenue because consumers will just start growing their own food on farms.Taxing food is less inefficient than taxing other things because there won't be too much deadweight loss.Taxing food is a bad way to raise revenue from an equity standpoint because poorer people spend a higher proportion of their income on

Answer 1

Answer:

1. False

2. False

3. True

4. True

Explanation:

1. Taxing food will generate a large amount of deadweight loss because people aren't very price sensitive in this market: FALSE

When people are not price sensitive to a product, it means that it is price inelastic. In this case, the demand is inelastic which is why the deadweight loss would be less as explained in part 3.

2. Taxing food won't generate any tax revenue because consumers will just start growing their own food on farms: FALSE

It is unlikely that people will grow their own food due to many constraints such as the time and energy required, the availability of land space and the skills needed to grow own food. Especially since food is an essential and has an inelastic demand, taxes on food would generate revenue.

3. Taxing food is less inefficient than taxing other things because there won't be too much deadweight loss: TRUE

Food has an inelastic demand because it is a basic necessity of life. Due to this reason, the demand curve has a steep slope. Thus, even when there is a tax imposed causing a price increase, producer and consumer surplus will not reduce dramatically which means that there would be a small deadweight loss.

4. Taxing food is a bad way to raise revenue from an equity standpoint because poorer people spend a higher proportion of their income on food: TRUE

When poorer people spend a high proportion of income on food, most of their disposable income would be used to satisfy a basic need as food. Hence, they would have little remaining to satisfy their other needs and wants. This would cause their standard of living to decrease. It also means that it would be the poor population who are hit the hardest by such a tax implementation.