This Assignment is a Discussion. Each student is to provide a thoughtful answer to this question which is a simple scenario of the revenue test for elasticity of demand.
The Washington Post carried an article in June 1979 with the headline: ” Washington D.C. learns about Elasticity of Demand”. This article described the impact of an 8% sales tax on gasoline sales on the tax revenue of the City of Washington DC. However, the City Government of Washington D.C. observed that its tax revenue declined from the pre-tax levels. But every economics student agrees with the positive economic statement that a tax imposed on a product whose demand is inelastic can result in raising tax revenue. In your Discussion, verify if the tax was imposed on the right product based on elasticity of demand.
Each student should submit an answer explaining the factor(s) that may have been at work to cause tax revenue to decline. [Hint: What is the elasticity of demand for the types of products are likely to increase revenue if their prices were raised.
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