"Over the past 4 years, the expenditures made have been greater than the tax revenue collected. The local government seeks to raise tax revenue without causing a significant loss in welfare. The economic advisors suggest that the government should consider implementing a sales tax on goods with elasticities of demand and elasticities of supply as a way to raise tax revenue while minimizing the deadweight loss."

Inelastic demand

Inelastic supply

Explanation:

Demand is inelastic if a change in price has little or no effect on quantity demanded.

Supply is inelastic if a small change in price has little or no effect on the quantity supplied.

A sales tax increases the price of a good.

If demand and supply is inelastic and a sales tax is implemented, there would be little or no change in quantity demanded and supplied. As a result, revenue from tax would increase and deadweight loss would be minimized.

If demand and supply were elastic, and prices were increased, there would be a fall in quantity demanded and supplied. Income from tax would fall as a result and deadweight loss would be increased.

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