Describe the importance of price elasticity of demand for governments.

• tax increase may cause a less than proportionate fall in demand for price inelastic goods, leading to higher taxation revenue (1) for example if government increased tax on petrol, consumers would still buy the product, and therefore government revenue would rise (1)

OR

• tax increase may cause a more than proportionate fall in demand for price elastic goods, leading to lower taxation revenue (1)
• it may be used to justify the use of subsidies to boost consumption of healthy goods, if demand is elastic (1)

(From 2021 Higher Economics Assessment Resource Q3d(ii))