In the country of Bora Bora, consumers buy large quantities of alcohol, tobacco, and coffee. Last year, the prices of these goods each increased by 10 percent. The quantities demanded for these goods fell by 10, 3, and 8 percent, respectively. If the government is thinking about imposing a unit tax on one of these goods, which good should they choose to tax to raise the most tax revenue, and why?
A) Alcohol; because the price elasticity is highest.
B) Tobacco; because the price elasticity is lowest.
C) Coffee; because it will have the lowest tax elasticity.
D) Tobacco; because it will have the highest tax elasticity.

Question

Quizplus · Accepted Answer

The government should choose to tax tobacco because it has the lowest price elasticity of demand (consumers are less responsive to changes in the price). This means that even if the government imposes a tax on tobacco, consumers will still continue to buy it, and the government can raise more tax revenue compared to the other goods with higher price elasticities.

In the Country of Bora Bora, Consumers Buy Large Quantities