Question

Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the a larger the price elasticity of demand. b smaller the price elasticity of supply. c larger the amount of the tax. d All of the above are correct.

Answer 1

Answer:

The correct answer is option b.

Explanation:

The imposition of a tax causes the price of the product to increase. The price paid by the consumer increases while price received by the producers gets reduced.  

This change in price causes the equilibrium quantity to decrease. This reduction in quantity creates a deadweight loss.  

The deadweight loss will be smaller if the price elasticity of supply is smaller as well. Smaller price elasticity means that a change in price will create smaller changes in the quantity supplied. Smaller change in quantity will create smaller deadweight loss.