20% sales tax will not lead to a 20% or greater loss in sales as the price will be increased to include tax. This will happen because the costs of doing business will increase. As a result, since the price increases, the quantity demanded will decrease, according to the law of demand. The quantity supplied could also change since the customers may be willing to buy less at the new higher price. As sales tax causes the supply curve to shift leftward, the equilibrium price will fall. This means that the price at which a business is willing to sell marijuana is greater than the price at which customers want to buy it. Thus, the profit generated by the business will decrease, and the exact amount of such a decrease will depend on the pricing structure of the business. It can be said that by charging a 20% sales tax on marijuana government shifted the supply-demand equilibrium.
Elastic demand is the one that is responsive to changes in price, and inelastic demand is the one that is not affected by such changes. The elasticity of demand is, among other things, impacted by the price level of a good or a service, type of good, and a customer’s income. One may think that marijuana in this situation would be facing rather inelastic than elastic demand since there would be no readily available substitute for a good. If there was another marijuana business in the town, the demand for marijuana would be more elastic. Since there is only one marijuana business, people who want to buy marijuana will have no other choice than to buy it at a higher price. In this particular example, the elasticity of demand for marijuana may be compared to the elasticity of demand for tobacco, which is inelastic.