Question

4. Suppose the price elasticity of demand for Good X is zero. Government imposes a unit tax on the sellers of this product. Does this tax policy result in a Dead-Weight-Loss to the society? Explain your answer?

Answer 1

Zero price elasticity of demand means demand is perfectly inelastic. That means, quantity demanded doesn't change as price changes and shape of demand curve is vertical. If a unit tax is imposed on the sellers of this Market, the entire tax will be borne by the Consumers because their demand for the good is perfectly inelastic.

Tax causes Deadweight loss because it causes change in behavior of buyers and sellers. Tax causes buyer's price to increase and they tend to Consume less. Also, tax lowers the price producers receive. So, producers produce less. But when demand is perfectly inelastic, there is no change in the behavior of producers or Consumers. So, Deadweight loss is zero.