The greater the elasticity of demand and supply, the greater is the efficiency loss of a tax.

Question

Quizplus · Accepted Answer

When the demand and supply are more elastic, it means that consumers and producers are more responsive to changes in price. So, if a tax is imposed, it will cause a larger distortion in market equilibrium, resulting in a greater loss of efficiency. On the other hand, if demand and supply are inelastic, consumers and producers are less responsive to price changes, making the impact of tax less severe.

The Greater the Elasticity of Demand and Supply, the Greater