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15 May, 19:26

How do elasticities of supply and demand affect DWL?

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  1. 15 May, 23:14
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    Because the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger DW losses.

    Explanation:

    As a tax grows larger, it distorts incentives more, and its DW loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.
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