Suppose an excise tax is imposed on two products X and Y, both of which have identical supply elasticities. The demand for good X is highly elastic, while the demand for good Y is highly inelastic. The deadweight loss (or excess burden) will be
A) equal in both cases.
B) larger for good X than good Y.
C) larger for good Y than good X.
D) zero in both cases.

Question

Quizplus · Accepted Answer

The deadweight loss is larger for goods with more elastic demand because the quantity traded decreases more significantly, leading to a greater loss in total welfare. Since good X has highly elastic demand, the deadweight loss will be larger for good X than for good Y, which has inelastic demand.

Suppose an Excise Tax Is Imposed on Two Products X