Price Elasticity of Demand (PED)

PED also matters for the government.

• Taxes on inelastic goods raise large tax revenue with a small fall in quantity sold. This is why "sin taxes" on cigarettes, alcohol and fuel are so common: these goods are inelastic, so the tax raises revenue without wiping out the market.
• Taxes on elastic goods raise less revenue and shrink the market a lot. A high tax on a luxury good would push consumers to substitutes, and tax revenue would fall.
• Subsidies on elastic goods produce a large rise in quantity demanded for each pound of subsidy spent. This is why subsidies for renewable-energy products like solar panels are designed to be substantial: demand responds strongly.

A common slip: saying that an inelastic good's demand does not fall at all when its price rises. It does fall, just by a smaller percentage than the price rise. When cigarette duty rises, smoking really does fall a little, but by less than the price has risen.