Question

Taxing markets where consumers and producers are relatively ____________ to price changes will generate the most tax revenue because the equilibrium quantity after the tax will ________________ after the tax is imposed.

		a. unresponsive; not decrease by much
		b. unresponsive; decrease by a lot
		c. responsive; not decrease by much
		d. responsive; decrease by a lot

Answer 1

a. unresponsive; not decrease by much

Taxing markets where consumers and producers are relatively unresponsive price changes will generate the most tax revenue because the equilibrium quantity after the tax will not decrease by much after the tax is imposed.

Explanation

Taxing products which are unresponsive to price changes will maximize tax collection as the quantities will not change much when the prices are increased due to the tax being levied. This will ensure that the tax revenue collection is higher when compared to cases where tax is being levied on products that are responsive to prices. For example, ciggarettes are products whose equilibrium quantity does not change much when prices are changed. This leads to them being heavily taxed. Instead, if the government were to tax products that are responsive to price changes, the equilibrium quantity would decrease, leading to a drop in tax revenues.