**6. Changing demand elasticities**

Criticisms done within the context of the basic assumptions of Ramsey taxes' inverse elasticity rule become more serious especially on the topic of income redistribution. Inverse elasticity rule creates a conclusion in line with efficiency but to the detriment of equality by suggesting taxation of necessity goods, which occupy a heavy place in the consumption basket of lower income groups, at a high rate and goods appealing to higher income groups at lower rate depending on demand elasticity.

Besides the assumptions in inverse elasticity rule mentioned above that are subject to criticisms, another topic to be emphasized is whether demand elasticity varies within the framework of macroeconomic and microeconomic variables.

> did not cause a change in the amount demanded in the short term; however, fuel efficient solutions with the technology developed in the long term allowed price elasticity of demand

Optimal Taxation of Consumption in the Scope of Changing Elasticities of Demand...

http://dx.doi.org/10.5772/intechopen.74378

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In this way, short and long term price elasticity of demand for products with substitutes that need time to be developed may differ. Because of this reason, although goods with low price elasticity of demand are advised to be taxed at higher rates in Ramsey taxes within the tax structure that will not damage efficiency, in the long term, price elasticity of demand for many goods including necessity goods increases. In such a case, since tax rates will decline as part of increased elasticity, it will be difficult to achieve the budget revenue planned in the beginning

Criticism of Ramsey taxes, which will be applied within the scope of the inverse elasticity rule because luxury goods have high demand elasticity and necessity goods have low demand elasticity, because of its elasticity assumptions may change as part of competition, which is the main abettor of market economy today. Total revenue and demand elasticity for products are important variables in providing profit maximization, which is the principal purpose of

Firms can increase their total revenues by decreasing the demand elasticity for their products. In this context, firms aim to decrease the vulnerability of the products they produce against

to increase.

without negatively affecting efficiency.

**Figure 2.** Changing demand elasticity.

firms competing in market economy.

**6.2. Commercial liberalization and changing demand elasticity**

A change that may occur in demand elasticity of luxury and necessity goods may build a fairer structure for the inverse elasticity rule in terms of income distribution, and the abovementioned taxes criticized in practice within the context of enabling justice in income distribution, which is among the main functions of the state, may be reassessed as part of changing demand elasticity. Under this assumption, in this part, changes in elasticity of luxury and necessity goods that could be created by macrovariables and microvariables within the changing economic conjuncture will be addressed.
