Definition
- Taxing and subsidising
- Taxing and subsidising uses the elasticities of demand and supply, which decide how much a tax raises and cuts consumption, and how far a subsidy raises output.
Example
Can you think of an example of taxing and subsidising?
A tax on a good with inelastic demand, such as cigarettes, raises a lot of revenue but cuts consumption little, and buyers bear most of it.
Test yourself
Can you name the four decisions an elasticity estimate helps to make?