Why is it ineffective to tax inelastic products as a means to deter their consumption?

  1. Define terms: An inelastic good is product for which demand does not reduce significantly as a result of an increase in price. This generally means that price increase have little impact on how much of the good is sold, or how much revenue is accrued by sellers. 

Taxation is a method used by governments to influence the market. When governments impose a tax, they require that a portion of the revenue is given to the state. Sellers often pass on that tax to customers by increasing the price of the good by the amount taxed. Governments often tax goods that are considered harmful to general society (those that incur negative externalises) or those that are harmful to the individual.

  1. Answer Question: If a product is inelastic, when price increases, consumers will continue to purchase it. This is becuase often these goods have no alternatives meaning the substitution effect never happens and and consuemrs continue to purchase the good, or simply becuase the buyers covet the good to a degree that they are willing to ignore the price

  2. Equations and examples: >>insert inelastic demand curve graph, show price increase has no/low impac<<  and example is gasoline, this is a product that can cause negative externalities in teh form of pollution an dis thus often taxed. Despite this, people continue to pay for it as there are few viable alternatives. Consumers require teh product to for their cars and therefore do not stop driving. 

  3. Analysis: Overall, tax on inelastic product is an ineffective way to deter use of products that are deemed harmful. As consumers will continue to use the product regardless of price, deterring the use of these products is best done by changing user's perception of the product. for example, adverting the harms of smoking can have more impact than raising the price of cigarettes. 

Answered by Uchechi O. Economics tutor

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