Public policy decision

The concept of elasticity of demand is equally importance in public police formulation as mentioned below:

• Declaration of public utilities :The concept of elasticity helps the government to decide which industries should be declared as public utilities and run by itself.If the demand for the product of a firm is inelastic,the government can declare that industry as public utility and run by itself,because the private monopolist can exploit the people due to inelastic demand.
• Determination of terms of trade :The concept of elasticity of demand helps to increase the gains of international trade.It enable the government to determine the terms of trade between two countries.The terms of trade refers to rate of exchange of goods of one country with other country.If the demand for foreign good is inelastic in local market,high price can be fixed by foreign countries.Likewise,if the demand for domestic product is inelastic in foreign market,we can fix high price.
• Determination of rate of foreign exchange :The concept of elasticity of demand is useful in determination of the rate of foreign exchange of domestic currency.The government should study the elasticity of export and import demand before devaluation or revaluation.The effects of devaluation or revaluation on balance of payment can be known only if the elasticity of demand is known.
• Importance in fiscal policy :The concept of elasticity of demand important is fiscal policy,particularly in formulation of tax policy.The government or the finance minister will have to known the elasticity of demand before imposing taxes.The imposition of taxes increase the price of commodities.Hence,if the demand for a commodity is elastic,the demand decision.But if the demand is inelastic,the public revenue increase.Hence,the government can impose high taxes in the commodities having inelastic demand except the necessary goods.