Short Answer

Evaluating Tax Policies for Dual Objectives

A city government has two distinct policy goals: 1) to significantly reduce the consumption of a particular product, and 2) to generate a stable and substantial amount of tax revenue. They are considering imposing a per-unit tax on one of two different products. Product X has a highly elastic demand, while Product Y has a highly inelastic demand. Explain which product should be taxed to best achieve each of the two goals. Justify your reasoning for each goal by referencing the relationship between the tax, the resulting price change, and the expected change in quantity demanded.

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Updated 2025-10-06

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