Question

How are the elasticities in the below questions different? Beyond the math, why?

Recreational marijuana was legalized in the state of Washington in July of 2014 creating a new source of revenue for the government. July 1,2015, the state government raised excise taxes paid by marijuana retailers on final sales leading to the following effects on prices and quantity sold: Quantity Sold (average grams per day) Price (per Date gram) 13.18 13.48 13.48 June 2015 (e 310.0 tax change) July 2015 August 2015 303.1 The above example is adapted from a recent study into the effects of an increase in taxes on the marijuana market in Washington (Hansen, Miller, & Weber, 2017). The authors can estimate the price elasticity of demand from these data points because the sudden tax change created a ceteris paribus situation, where all other supply and demand conditions were held fixed, similar to the way our models assume in the textbook. In that spirit, interpret the excise tax increases as an increase in input costs for marijuana dispensaries holding all other supply and demand characteristics fixed 307.0 Comparing June 2015 to July 2015, using the arc formula for price elasticity of demand: What is the price elasticity of demand? If the business didn't have to pay the sales tax to the government, what affect would the price increase have had on their revenue? Type your response in the box below.

Answer 1

We can make a case for it in two ways:

1) Mathematically, when we are comparing June to July and then June to August we see from the table that the change in price between each of the two periods is the same. But quantity fell lesser in July than it did in August due to which we arrive at different values of elasticities.

2)Now,intuitively, when a law comes into effect it is relatively easier to change prices quickly but supply/demand takes a longer time to respond to such changes. Hence, as visible, quantity demanded fell less in the subsequent month(July) because it takes time for people's preferences to adjust. So in the short period of time, most of the goods have inelastic demand. But as we move forward, we see that preferences have changed and it's effect is now visible in how people demand the good. So in the longer run, goods and the elasticities associated are usually either elastic or unit elastic.