A tax that creates the smallest deadweight loss occurs in markets with inelastic demand and inelastic supply curves.

Question

Quizplus · Accepted Answer

When demand and supply are inelastic, the buyers and sellers of the product are less responsive to changes in price. Therefore, a tax on the product will cause minimal changes in the quantity demanded and supplied, resulting in a smaller deadweight loss compared to markets with more elastic curves.

A Tax That Creates the Smallest Deadweight Loss Occurs in Markets