The government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: palm wine and diapers
If the price elasticity of demand for the goods are -0.47 and -1.89 respectively, which good should it tax if the goal is to raise revenue? If the government wants to tax only one good, which good should it tax if the goal is to discourage consumption? Explain your answer.
If the goal is to raise revenue, it should tax palm wine. The demand for palm wine is inelastic, so an increase in its price will result in an increase in revenue. If the goal is to discourage consumption it should tax diapers since the demand for diapers is elastic, while the demand for palm wine is inelastic.
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