Question

Which of the following will be true?

Statement (i) :Taxing a good with a perfectly inealstic demand will cause deadweight loss.
answered
Statement (ii): Taxing a good where the demand is downward sloped and the supply is upward sloped will not cause any deadweight loss

a. Statement is false but Statement it is true
b. Statement is true but Statement II is false.
c. Both statements are true.
d. Both statements are false.

Answer 1

Both statements regarding the tax incidence and elasticity of demand and supply are false. A tax on a good with perfectly inelastic demand does not result in deadweight loss, while a tax on a market with downward sloping demand and upward sloping supply does cause deadweight loss.

Step-by-step explanation:

Examining the statements provided, we must consider tax incidence and the concepts of elasticity of demand and supply in economics. For Statement (i): Taxing a good with a perfectly inelastic demand means that consumers would continue to buy the same amount even after a price increase due to tax, so there would be no excess burden or deadweight loss. Thus, Statement (i) is false. On the other hand, Statement (ii) claims that taxing a good where the demand is downward sloped and the supply is upward sloped would not lead to any deadweight loss. However, taxes in such markets do typically create inefficiencies as they prevent some transactions that would otherwise occur, leading to deadweight loss. Therefore, Statement (ii) is also false. The correct response is that both statements are false (d).