Targeting inelastic demand boosts indirect tax revenue

Steps:

• Indirect taxes, like sales taxes, raise prices and aim to generate government revenue without significantly reducing consumption.
• Effectiveness means maximizing revenue yield, which depends on how much quantity demanded falls after the tax increases price.
• Price elasticity of demand measures responsiveness: inelastic demand (elasticity <1) means quantity falls little, so tax revenue rises.
• Thus, applying taxes to inelastic goods/services ensures high revenue collection.

Why D is correct:

• Price-inelastic demand means consumers buy nearly the same quantity despite higher prices from taxes, maximizing revenue per the tax incidence formula where revenue = tax rate × quantity sold.

Why the others are wrong:

• A: Bartering avoids indirect taxes on monetary transactions, reducing taxable sales and revenue.
• B: Higher savings rates divert spending from taxed goods/services, lowering consumption and tax base.
• C: Informal markets evade taxes entirely, shrinking the formal economy's taxable transactions.

Final answer: D