Q.

If the main objective of the government is to raise revenue, it should tax commodities with

A. high elasticity of demand
B. low elasticity of supply
C. low elasticity of demand
D. high income elasticity of demand
Answer» C. low elasticity of demand
Explanation: The Ramsey rule states that commodities with low elasticities of demand should be taxed at higher rates than commodities with high elasticities of demand. However, low- income people might spend a higher proportion of their incomes on commodities with low elasticities of demand (food, clothing, and so on) than might high-income people. Consequently, following the Ramsey rule may result in a regressive taxation scheme society may view as inequitable.
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