Question
A government decides to impose a tax on sugary drinks to
discourage consumption due to health concerns. If the demand for sugary drinks is relatively inelastic, what is the likely impact of this tax on: i) Quantity demanded of sugary drinks ii) Tax revenue collected by the governmentSolution
When demand is inelastic, consumers are less responsive to price changes. Therefore, even with the tax-induced price increase, the quantity demanded of sugary drinks will decrease only slightly. However, since the tax is applied to each unit sold, the government will collect more tax revenue due to the relatively stable demand.
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