According to Standar microeconomic theory, which of the following is likely to impose the largest excess...
According to Standar microeconomic theory, which of the following is likely to impose the largest excess burden (deadweight loss)? A tax on
1. Energy consumption
2. Interest income from bank accounts
3. land ownership
4. staple food consumption
Homework Answers
Option 2 is correct
Energy consumption, land ownership and staple food consumption are are examples of goods with inelastic demand. When demand is inelastic the deadweight loss is smaller because quantity reduction is small. However in case of interest income from bank accounts, the demand is relatively elastic which means the size of a dead weight loss will be highest of all.
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