Question

5. Describe how deadweight loss changes when demand is elastic and inelastic.

8. 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

5. Tax causes deadweight loss because it changes Consumers and producers behavior. When a tax is imposed on a market that has more elastic demand, increase in Consumers' price will result in a large decrease in quantity demanded because more elastic demand means Consumers can easily leave the market. But if demand is inelastic, increase in Consumers' price will not decrease quantity demanded that much because less elastic demand means Consumers can't easily leave the market. Therefore, tax on a market that has elastic demand causes a larger Deadweight loss and tax on a market that has inelastic demand, causes a smaller deadweight loss.