The price elasticity of demand for gasoline is 0.27 and for wine is 2.9. If the government had the choice of taxing only one, which of the following should it choose?
A) tax gasoline
B) tax wine
C) tax neither, but raise the price elasticity of demand for each
D) tax neither, but lower the price elasticity of demand for each
E) tax neither, but raise the price elasticity of demand for gasoline and lower it for wine

Question

Quizplus · Accepted Answer

The government should tax gasoline because its price elasticity of demand is inelastic (0.27), meaning consumers are less sensitive to price changes and demand will not decrease significantly, ensuring steady tax revenue. Wine, with an elasticity of 2.9, is highly elastic, indicating consumers are more responsive to price changes, and a tax could significantly reduce demand and tax revenue.

The Price Elasticity of Demand for Gasoline Is 0