Explain price elasticity of demand and how this may impact government taxation

In economics goods/services usually have either elastic or inelastic elasticities of demand. Elastic demand means that a change in price results in a proportionally larger change in quantity demanded, which is often represented by a flatter demand curve. Whereas inelastic demand applies when a change in price results in a proportionally smaller change in quantity demanded, characterised by a steeper demand curve.In terms of government taxation, if the market of a good is more susceptible to an increase in price, causing demand to decrease significantly, a tax will effectively lower consumption. However government revenue will be lower as a result of fewer consumers being willing to pay the higher price. To obtain more government revenue, an inelastic market would have to be taxed, because the demand of the good decreases proportionally less when the price of said good increases. Meaning consumers are more likely to purchase the good despite of the fact that price has increased.

Answered by Isobel W. Economics tutor

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