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    Elasticity of Demand and taxation

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    Consider this:

    You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. In your own words please give a detailed explanation as to why would elasticity of demand be important to you in determining the products on which the taxes should be levied?

    Please fully explain your answer in a way that shows depth and understanding, using real world examples and/or knowledge, of elasticity of demand.

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    Solution Preview

    Elasticity of demand is perhaps the most important factor in taxation. It determines whether revenue will be raised, or if the implementation of the tax will just be a burden on society.

    The best way to demonstrate this is with examples. First let's look at a good with a high elasticity of demand such as luxury cars. A ...

    Solution Summary

    Why elasticity of demand is important for taxation decisions