Question

Which of the following is an efficient way for the government to collect tax revenues?

A) Impose a per unit tax on sellers in a market with highly elastic supply.
B) Impose a per unit tax on buyers in a market with highly elastic demand.
C) Impose a per unit tax on both buyers and sellers in a market with highly elastic demand and highly elastic supply.
D) Impose a per unit tax on buyers in a market with perfectly inelastic supply.

Answer 1

The government to collect tax revenues is, C) Impose a per unit tax on both buyers and sellers in a market with highly elastic demand and highly elastic supply.

Step-by-step explanation:

Per Unit Tax on Both Buyers and Sellers: This option suggests taxing both buyers and sellers. This approach spreads the tax burden across both sides of the market.

Market Elasticity: The efficiency of tax collection is optimized when imposed on a market with highly elastic demand and supply. Elasticity ensures that buyers and sellers can respond to the tax by adjusting their behavior.

Highly Elastic Demand and Supply: In a market with highly elastic demand and supply, small changes in price lead to significant changes in quantity demanded and supplied. This makes it easier for market participants to adjust to the tax, minimizing deadweight loss and ensuring economic efficiency.

Comprehensive Approach: Taxing both buyers and sellers ensures a more comprehensive and fair distribution of the tax burden, promoting economic efficiency.