alleryGovernments tend to raise indirect taxes on goods such as alcohol and tobacco mainly because the demand for these goods is:
APerfectly elastic
BRelatively elastic
CRelatively inelastic
DNegatively income elastic
Answer & Solution
Correct answer: C. Relatively inelastic
1. If demand is inelastic, a price rise from a tax cuts quantity less than proportionately.
2. So tax revenue stays high even after the price increase.
3. Alcohol and tobacco have relatively inelastic demand.
4. Hence governments raise indirect taxes on them because their demand is relatively inelastic.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.29_
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