You are a policy maker who is interested in increasing tax revenues in order to reduce the Federal budget deficit. One proposal that has been suggested is to increase excise taxes on certain goods. Some of the options suggested are: vacation travel such as cruises liquor and cigarettes gasoline theater and concert tickets Based on your knowledge of elasticity of demand, which items would you choose? Explain.
Ans) Putting tax on most inelastic item will be most beneficial as it will ensure more and regular revenue. Among the given items, I will advise to tax liquor and cigarettes, as the demand for these is most inelastic or probably nearly Perfectly inelastic. The consumers of liquor and cigarettes are most loyal, they do not change their demand, no matter what the price is. Further, these items are addictive in nature and therefore their demand will rise more in future.
You are a policy maker who is interested in increasing tax revenues in order to reduce...