In which of the following situations would a particular tax

In which of the following situations would a particular tax result in the LEAST deadweight loss?

a. a price inelastic supply and a price inelastic demand

b. a price elastic supply and a price inelastic demand

c. a price inelastic supply and a price elastic demand

d. a price elastic supply and a price elastic demand

Solution

Inelastic supply means suppliers response less by the change in price. So if the tax is imposed suppliers receive less than market price but does not decrease their production much. If the price they received decrease by 1% supply will be decreased less than 1%.

Inelastic demand means consumers response less by the change in prices. If a tax is imposed consumers have to pay more than market price but does not decrease their consumption much. Demand will be decreased by less than 1% by imposing 1% increase in prices.

Inefficiency is less with inelastic supply and demand. Option a is correct.