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3. The government is considering imposing taxes at different rates on three products. The first is...

3. The government is considering imposing taxes at different rates on three products. The first is a tax on whole milk. The second is a tax on all dairy products. The third is a tax on all food products.
a.   State and explain in a sentence the inverse elasticity rule.
b.   Order the three products according to their elasticity. Which would have the highest and which the lowest tax rate to minimize excess burden?

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Answer #1

3.

A

As per this rule, lower tax is applied to goods of higher elasticity and higher tax is applied to goods of lower elasticity.

B.

Whole milk has lowest level of elasticity, dairy products has relatively higher elasticity and food products have highest level of elasticity. It means that whole milk will have the highest tax and food products will have lowest tax burden to minimize the excess burden.

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