The government can raise revenue by taxing the sellers without creating deadweight loss when the demand for the goods being taxed is perfectly inelastic. A tax that raises no revenue for the government cannot have any deadweight loss

Question

Esmeralda

Business

13 June, 15:38

The government can raise revenue by taxing the sellers without creating deadweight loss when the demand for the goods being taxed is perfectly inelastic. A tax that raises no revenue for the government cannot have any deadweight loss

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Answers (1)

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Damian Ibarra · Answer 1

the demand for the goods being taxed is perfectly inelastic.

Explanation:

When an indirect tax is levied, its burden can be shared between buyers & sellers. More inelastic demand / supply implies more burden on buyers / sellers respectively. The burden is shared between through price adjustment.

So: the tax levy leads to change in consumer surplus, change in producer surplus, change in government revenue & a deadweight loss which is gained by neither consumers / producers / government.

If demand is perfectly inelastic, entire tax burden is shifted to buyers in form of price rise. The entire consumer surplus lost is gained by government as extra tax revenue. So, their is no deadweight loss in this case.