Simply put, the more elastic the demand of a good, the less the amount of revenue government can generate from tax. The more inelastic the demand of a good is, the higher the amount of revenue that can be generated from tax. (PARKIN , 2008). This is because goods that have a very inelastic demand quantity demanded is very slow to respond to the change in price that a tax adds while goods that have a very elastic demand respond very quickly to the change in price. A good example is tobacco and energy drinks. Tobacco has very few substitutes. This means that it demand is inelastic. As a result of this government tax on tobacco is very high. Energy drinks on the other hand have many substitutes. They have a very elastic demand. A high tax on them would just mean that consumers buy a substitute that is cheaper.
List of references:
· PARKIN, M, POWELL, M, MATTHEW, K, 2008. Economics (7e). Essex, England: Pearson.
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