Suppose that the market for product X is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. Suppose the price elasticity of supply is 0.7 . Will the deadweight loss from a $3 tax per unit be smaller if the absolute value of the price elasticity of demand is 0.6 or if the absolute value of the price elasticity of demand is 1.5?
The deadweight loss will be smaller if the price elasticity of demand is 0.6 because the more inelastic the price elasticity of demand, the less quantity will decrease due to the increase in price from the tax. The smaller the decrease in quantity, the smaller the deadweight loss.
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