A government is considering levying an alcohol tax to raise revenue to finance health care benefits. People for the tax argue that alcohol demand is price inelastic. Which of the following statements is true?

A) The alcohol tax may not raise as much revenue as anticipated in the years to come because alcohol demand is more elastic the longer the period of time consumers have to adjust.
B) This is a very good way to raise revenue both in the short term and in the long term because there are no close substitutes for alcohol.
C) This tax will not raise much revenue either in the short term or the long term because demand is price inelastic.
D) No tax revenue can be raised in this way because alcohol sellers will just lower their price by the amount of the tax, and therefore the consumer price of alcohol will not change.

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Falon Evans · Accepted Answer

Final Answer : A, Explanation :  Demand for goods, including alcohol, tends to become more elastic over time as consumers find substitutes or adjust their consumption habits, potentially reducing the effectiveness of the tax in raising revenue.

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