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

Answer 1

Answer: b) Supply is inelastic and demand is inelastic.

Explanation: Dead-weight loss is the loss in total surplus when a tax is imposed on a good which restricts demand and supply from balancing. When both the demand and the supply curves are inelastic, the effect of a tax will be lead to a small change in the quantity being traded in the market. Thus, the equilibrium quantity at the taxed price will not fall much and the dead weight loss will therefore, be smaller.