Asked by Destiny Marsh on Apr 27, 2024
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A government is considering levying an alcohol tax to raise revenue to finance health care benefits. People for the tax argue that alcohol demand is price inelastic. Which of the following statements is true?
A) The alcohol tax may not raise as much revenue as anticipated in the years to come because alcohol demand is more elastic the longer the period of time consumers have to adjust.
B) This is a very good way to raise revenue both in the short term and in the long term because there are no close substitutes for alcohol.
C) This tax will not raise much revenue either in the short term or the long term because demand is price inelastic.
D) No tax revenue can be raised in this way because alcohol sellers will just lower their price by the amount of the tax, and therefore the consumer price of alcohol will not change.
Price Inelastic
Refers to a situation where the quantity demanded or supplied of a good or service changes by a smaller percentage than changes in price.
Alcohol Tax
A tax imposed on the sale of alcoholic beverages, often used as a means to discourage excessive drinking and to generate government revenue.
Revenue
The total amount of money generated by a company from its business activities, such as sales of goods or services, before any expenses are subtracted.
- Understand the association between how demand reacts to price changes and the creation of tax revenue.
- Identify when a tax on goods is likely to be effective in both reducing consumption and generating revenue.
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Learning Objectives
- Understand the association between how demand reacts to price changes and the creation of tax revenue.
- Identify when a tax on goods is likely to be effective in both reducing consumption and generating revenue.
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