Approximately 80 percent of mothers of infants in the United States use infant formula.Infant formula has an extremely low price elasticity of demand.As a result,the government could raise substantial revenues by placing high excise taxes on infant formula,and these high taxes would generate relatively modest deadweight losses.What is the likely reason that the government does not increase the tax on infant formula? Explain your answer.

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Quizplus · Accepted Answer

The government likely does not increase the tax on infant formula because they would have to trade off efficiency to promote equity. While high excise taxes on formula would generate substantial revenues, they would also create a deadweight loss because of the inelastic demand for formula. Additionally, formula is a necessary item for many families and increasing the tax would disproportionately affect low-income families, creating an equity issue. Therefore, the government would need to balance the potential revenue with the negative impact on efficiency and equity.

Approximately 80 Percent of Mothers of Infants in the United