"If government wishes to tax certain goods, it should tax goods that have inelastic rather than elastic demand." What is the rationale for this statement?

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The rationale for this statement is fairly straightforward. "Elasticity" of demand refers to the extent to which demand will change along with price. For example, gasoline is fairly demand inelastic, because people and business need it. So the demand for gasoline will probably stay roughly the same even if its price goes up. Demand for some other goods that are not necessities, like designer clothing or electronics, will be affected by price increases. People will demand less of them if their price is too high.

Anytime a government taxes a good, the tax is passed on to the consumer in the form of price increases. In order for the tax to raise revenue, people have to keep...

(The entire section contains 2 answers and 356 words.)

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