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.

Question

Quizplus · Accepted Answer

The government likely does not increase the tax on infant formula because it considers the equity implications of such a tax. Infant formula is a necessity for many families, and a high tax could disproportionately affect lower-income households. By not imposing high taxes on infant formula, the government is showing a preference for promoting equity over maximizing tax revenue with minimal efficiency loss.

Approximately 80 Percent of Mothers of Infants in the United