Question 1

Country Z is suffering from overuse (overconsumption) of polythene (plastic) bags which are very

harmful for the environment. Country Z has a lot of substitute for polythene bags, such as paper and

jute bags.

a) Is the price elasticity of demand of polythene bag likely to be relatively elastic or inelastic? Explain the

reason (logic) behind your answer. (1 marks)

To reduce the use of polythene bags, the government has decided to impose a tax on the sellers of

polythene bags. The sellers have to pay a tax of 2 taka for every polythene bag sold.

b) Using the Theory of Demand and Supply, discuss how a tax on the sellers of polythene bag can help

protect the environment. How does the tax affect the buyers and sellers of polythene bags? Your

answer should include a well-labeled diagram. (5 marks)

c) The cross price elasticity demand:

%Qd of polyt hene bags/

%P of jute bags= 1.5

What are all the information can you obtain from the given cross price elasticity of demand?

How can the government use this information to reduce the use of polythene bags?