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According to the source, what happens to tax revenue in a market where both demand and supply are very elastic?
AThe tax cannot be collected at all
BThe tax generates low revenue
CThe tax generates high revenue
DThe tax revenue is unrelated to elasticity
Answer & Solution
Correct answer: B. The tax generates low revenue
1. When demand and supply are both very elastic, buyers and sellers can easily reduce the quantity they trade instead of absorbing higher prices.
2. That shrinks the quantity on which the tax is collected.
3. An excise tax generates low revenue in such a market.
4. The tax can still be collected, just on a much smaller quantity, so it does not become impossible to collect.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.3 | Elasticity and Pricing_
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