Suppose supply is perfectly inelastic, while demand is relatively elastic.A tax of $1.00 is levied on the purchasers of the good.Which of the following statements is correct?
A)the government will fail to raise any tax revenue
B)there will be a positive deadweight loss
C)there will be no deadweight loss
D)government revenue will be less than the deadweight loss of the tax.

Question

Quizplus · Accepted Answer

When supply is perfectly inelastic, it means that the quantity supplied does not change in response to changes in price. Therefore, the entire burden of the tax will be borne by the buyers, and there will be no change in the quantity sold. Since demand is relatively elastic, it means that buyers are responsive to changes in price, and the tax will result in a higher price, but not a significant decrease in the quantity sold. Therefore, the tax incidence falls entirely on the buyers, and there is no deadweight loss. The government will raise tax revenue equal to the amount of the tax ($1.00).

Suppose Supply Is Perfectly Inelastic, While Demand Is Relatively Elastic