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What's the importance of price elasticity of demand to the government?

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ilonga | Student, Undergraduate | eNotes Newbie

Posted October 18, 2011 at 8:10 PM via web

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What's the importance of price elasticity of demand to the government?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 18, 2011 at 10:38 PM (Answer #1)

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Price elasticity of demand is mainly of interest to the government for the purposes of taxation.  Governments in most places impose sales taxes or value-added taxes.  These sorts of taxes raise the price of goods and services to which they apply.

Governments need to know the price elasticity of demand for these goods and services so they can know the likely impact of the tax.  If the demand for hotel rooms (for example) is very inelastic, then the government can increase the sales tax on hotel rooms without creating a situation where hotels lose business and tax revenues fall.  Governments will not want to raise sales taxes on items that are very elastic.  Therefore, governments need to know about pirce elasticity of demand.

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