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The more elastic the demand curve, the greater deadweight loss a given tax will impose. This is because when demand for a good is inelastic (i.e. an increase in price doesn’t change how much of that good people want to buy) there will be less surplus being transferred from consumers to producers by way of this particular tax, so it can take more of the desired product away from consumers without affecting production or consumption as much and still generate revenue for the government through its taxation efforts.

When demand is elastic, the deadweight loss will be smaller because a higher tax on this good would cause people to buy less of it than they otherwise would at that price. This means there’s more surplus left over for producers and consumers alike after taxes are taken out.

entrepreneur, idea, competence @ Pixabay

The more elastic the demand curve, the greater deadweight loss a given tax will impose. This is because when demand for a good is inelastic (i.e., an increase in price doesn’t change how much of that good people want to buy) there will be less surplus being transferred from consumers to producers by way of this particular tax, so it can take more of the desired product away from consumers without affecting production or consumption.

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