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Elasticity and Its Applications
Quick questions on Applications of elasticity explained: tax incidence and policy - H2 Economics
5short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is subsidy incidence?Show answer
A subsidy shifts supply rightward (downward) by the amount of the subsidy, lowering price and raising quantity. By the same logic, the benefit goes mostly to the more inelastic side: if demand is inelastic, consumers gain most of the lower price; if demand is elastic, producers keep most of the subsidy.
What are elasticity in firm decisions?Show answer
Firms use PED to set prices (cut price for elastic goods, raise it for inelastic ones to grow revenue), use XED to price relative to substitutes and complements, and use YED to forecast how demand will move as incomes change. PES tells a firm and a regulator how quickly the market can respond to a price change.
What is q1?Show answer
A tax is placed on a good with perfectly inelastic demand. Who bears it and why? [2 marks]
What is q2?Show answer
Explain why governments tax inelastic goods to raise revenue. [3 marks]
What is q3?Show answer
Why might a tax fail to cut consumption of an addictive good much? [2 marks]
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