A government plans to implement a $1 tax in one of two markets: the first market has elastic supply and demand curves and the second market has inelastic supply and demand curves. If the government's aim is to raise the most revenue with the smallest deadweight loss, where should the tax be placed?

Question

Quizplus · Accepted Answer

The government should place the tax in the market with inelastic supply and demand curves because inelastic markets are less sensitive to price changes, leading to smaller decreases in quantity traded and thus smaller deadweight losses. Additionally, because consumers and producers are less responsive to price changes in inelastic markets, the government can raise more revenue.

A Government Plans to Implement a $1 Tax in One