Question

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.

A. small,small B. small, large C. large,small D. large,large

Answer 1

(A) small,small

Step-by-step explanation:

The greater the elasticities of supply and demand, the greater the deadweight loss of a tax and vice versa. Tax raises the price the buyer pay, lowers the price the sellers receive and reduces the quantity sold. Therefore a greater reduction in the quantity exchange in the market causes a greater deadweight loss; and deadweight loss increases as tax increases.