In order to enable the government of a country to increase its tax revenue, it will be advisable for it to increase taxes on_______

Step 1: Analyze the question The government wants to raise more tax revenue. We need to pick the good on which a tax increase will actually bring in the most extra money. This depends on how consumers (and producers) react to the price rise caused by the tax.

Step 2: The concept When a tax is placed on a good, its price rises. How much quantity demanded falls depends on price elasticity of demand (PED):

• Elastic demand (PED > 1): A small price rise causes a big fall in quantity bought. The tax base shrinks, so tax revenue may fall or rise only slightly.
• Inelastic demand (PED < 1): A price rise causes only a small fall in quantity bought. People keep buying almost the same amount, so the government collects more revenue.

So governments tax goods with inelastic demand (e.g. cigarettes, alcohol, petrol, salt) when they want reliable revenue.

Step 3: Evaluate the options

• A. Textile materials with elastic demand: Consumers will cut back sharply or switch to substitutes. Revenue is not reliable. ✗
• B. Alcoholic beverages with inelastic demand: Many consumers are habitual and keep buying despite higher prices. The quantity sold barely falls, so revenue rises. ✓
• C. Agricultural products with inelastic supply: Inelastic supply affects who bears the tax burden (producers bear more), but it is the demand side that decides how much the quantity sold falls. Also, the option is not specific about demand. It is not the best choice. ✗
• D. Luxury goods with elastic supply: Luxury goods usually have elastic demand, so buyers can easily cut back. ✗

Step 4: Answer The correct option is B, alcoholic beverages with inelastic demand.

Exam tip: "Raise revenue" = tax goods with inelastic demand. Remember the phrase: "Inelastic demand, tax is grand." Typical examples are alcohol, tobacco and fuel, and these are also called "sin taxes."