Economics - Question (Taxes)?

[ike.larry]

Consider four markets for luxury yachts, Markets A, B, C, and D. The demand for yachts in Market A is perfectly elastic. In Market B the price elasticity of demand, as an absolute value, is 3. In Market C the price elasticity of demand, as an absolute value, is 0.25. Finally, the demand for yachts in Market D is perfectly inelastic.

The elasticity of supply in all four markets is identical across every level of quantity. Answer the following questions.

If you wanted to lessen the efficiency costs of a specific government-imposed tax, upon which market would you impose the tax?

[Hubris252]

Market D. Deadweight loss is created when fewer goods are purchased as a result of taxation. When elasticity of demand is perfectly inelastic the demand curve is vertical, the market will clear the same number of yachts regardless of the price. A tax imposed in Market D will raise the price of yachts but will not lower the number of yachts sold.