Government revenue will increase if taxes are levied on goods with?

1. Analyze the question The question asks which type of demand would give the government the most tax revenue when a tax is placed on a good. This is about price elasticity of demand and tax incidence.

2. Explain the concept A tax raises the price of a good. How much quantity demanded falls depends on elasticity:

• Elastic demand: consumers are very sensitive to price, so a small price rise causes a large fall in quantity bought. The tax base shrinks and revenue falls or rises very little.
• Inelastic demand: consumers are not sensitive to price, so they keep buying almost the same quantity even after the tax. The government collects the tax on nearly the same quantity, so revenue rises.

Revenue = tax per unit × quantity sold. Revenue is highest when the quantity sold barely falls.

3. Solution, option by option

• A. Perfectly elastic demand: if the price rises even slightly, quantity demanded falls to zero. No sales means no tax revenue. ❌
• B. Fairly elastic demand: quantity falls by a larger proportion than the price rises, so the tax base shrinks a lot. ❌
• C. Perfectly inelastic demand: quantity demanded does not change at all, whatever the price. The full tax is collected on every unit, and the burden falls entirely on consumers. ✅
• D. Unitary elastic demand: quantity falls in the same proportion as the price rises, so the gain is only partly offset. Revenue is not maximized. ❌

4. Answer Strictly speaking, goods with inelastic demand are the best to tax. Of the options given, the one that fits best is C, perfectly inelastic demand.

5. Exam tip Remember: "Tax the needs, not the luxuries." Governments often tax goods with inelastic demand, such as cigarettes, alcohol, and petrol, because people keep buying them even when prices rise. When you see "tax revenue" in an elasticity question, think inelastic.