Which quality would make an excise duty appropriate?

Which quality would make an excise duty appropriate?

• A. Sales volume is large
• B. There are few large producers/suppliers
• C. Demand is inelastic with no close substitutes
• D. Demand is elastic with close substitutes

Answer: (C)

Excise duties work best when the taxed good has inelastic demand and few close substitutes. When demand is inelastic, a price rise from the tax leads to only a small drop in quantity demanded, so the tax raises revenue reliably and can also reduce consumption without driving consumers to substitute other products. If demand were elastic or substitutes were readily available, people would cut back or switch to alternatives, weakening both revenue and the policy goal. So the situation described—demand that is inelastic with no close substitutes—makes an excise duty most appropriate.

Excise duties work best when the taxed good has inelastic demand and few close substitutes. When demand is inelastic, a price rise from the tax leads to only a small drop in quantity demanded, so the tax raises revenue reliably and can also reduce consumption without driving consumers to substitute other products. If demand were elastic or substitutes were readily available, people would cut back or switch to alternatives, weakening both revenue and the policy goal. So the situation described—demand that is inelastic with no close substitutes—makes an excise duty most appropriate.