Why should the government consider the price elasticity of demand when imposing tax on goods?

The price elasticity of demand tells you how sensitive consumers are to a change in the price of a good. Therefore the more sensitive (elastic) the demand is, the more the tax will effect the demand. So, if the good has a relatively inelastic demand then a tax would cause relatively less percentage change in demand compared to the percentage change in price. This is the case for goods such as cigarettes, as they are addictive the demand is inelastic hence a tax would only marginally reduce demand. Thus if the aim of the government was to reduce the amount consuming cigarettes the PED would allow the government to realise that they should undertake different methods to deter consumers from purchasing cigarettes. Hence the PED helps the government foresee the result of the tax they would be imposing.

TT
Answered by Tamara T. Economics tutor

28874 Views

See similar Economics GCSE tutors

Related Economics GCSE answers

All answers ▸

Explain one consequence of a more globalised world?


How can the UK government use fiscal policy to target inflation levels in the economy?


What factors can shift the demand curve in a market?


Explain the meaning of the term ‘externality’ and give an example of one that is negative.


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences