Question

9. Describe how deadweight loss changes when supply is elastic and inelastic 10. Explain the difference between the benefits principle and the ability-to-pay principle.

Answer 1

9.

• Deadweight loss is greatly impacted by the elasticity of supply just like the elasticity of demand.
• When the supply is more elastic, the deadweight loss is also greater. This is because, when tax burden falls on producer's, they produce less and supply less. Which causes producer surplus to fall and hence the deadweight loss Increases as they taxes reduce the price recived by them.
• When the supply is inelastic, the deadweight loss is insignificant as producer's will continue to produce and supply more even if it increases their cost of production.

10.

• The difference between the benefits principle and the ability to pay principle depends on whom the burden of tax falls.
• According to the benefits principle, everyone who benefits or gains from the trade will have to pay the tax or bear the burden of tax.
• While, the ability to pay principle taxes people based on their income levels and wealth each of them possess. Those who have more income and wealth are taxed more than those who receive less income and wealth.