Principles of Microeconomics / Unit 4 MIC 0325 short lesson, about 20 seconds
Tax Revenue and Elasticity
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The idea
Tax revenue is the tax per unit times the after-tax quantity: a rectangle the wedge high and the new quantity wide. More elastic curves mean a smaller quantity and less revenue.
In practice
The same tax raises far more on an inelastic good than on an elastic one.
Where people slip
A revenue-raising tax and a consumption-reducing tax want opposite elasticities.
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