Question

15.You are a USDA economist, and the Senate Finance Committee has come to you for advice. The government is considering bolstering its finances by imposing a tax on either salt or blue cheese. You know that the markets for salt and blue cheese are roughly the same size, though the demand for salt is highly inelastic, while the demand for blue cheese is highly elastic. Which option do you recommend as the least costly choice?

Answer 1

As the demand for the Cheese are highly elastic, a tax on the cheese will increase the price of the goods and decrease the demand for the product. If the demand falls the tax collection will fall and the dead weight loss will be really high. Instead of taxing the cheese the government should tax the salt. The demand for the salt is inelastic i.e. when the price for the salt increase after the tax the demand will not decrease much. That will allow the government to get more and more taxes.

So, the government should tax the goods that is more inelastic. Here, it will be the salt.