Suppose that policymakers are considering placing a tax on either of two markets.In Market A,the tax will have a significant effect on the price consumers pay,but it will not affect equilibrium quantity very much.In Market B,the same tax will have only a small effect on the price consumers pay,but it will have a large effect on the equilibrium quantity.In which market will the tax have a larger deadweight loss
A)market A because the demand of the market is relatively inelastic
B)market B because the demand of the market is relatively elastic
C)market A because the demand of the market is relatively elastic
D)market B because the demand of the market is relatively inelastic

Question

Quizplus · Accepted Answer

The deadweight loss of a tax depends on how elastic the demand and supply are. In Market A, where the tax will have a significant effect on the price but not on the equilibrium quantity, the demand is relatively inelastic. Inelastic demand means that consumers are not very responsive to changes in price. Therefore, even if the tax significantly increases the price, consumers will still buy almost the same amount, leading to a small deadweight loss. In Market B, where the tax will have a small effect on price but a large effect on the equilibrium quantity, the demand is relatively elastic. Elastic demand means that consumers are very responsive to changes in the price. Therefore, even a small increase in price due to the tax will cause a significant decrease in the equilibrium quantity, leading to a large deadweight loss. Thus, the tax will have a larger deadweight loss in Market B compared to A.

Suppose That Policymakers Are Considering Placing a Tax on Either