How does the elasticity of demand affect the deadweight loss associated with taxation, considering the principles of economic efficiency?

The elasticity of demand measures how much the quantity demanded of a good changes when its price changes. When demand is elastic, a small increase in price due to taxation can lead to a large drop in the quantity demanded. This significant drop results in a larger deadweight loss because fewer transactions happen, meaning that the market is not operating as efficiently as it could. For example, if a tax on a luxury item like expensive watches causes many consumers to stop buying them, the tax revenue might be low, and the lost sales create deadweight loss. In contrast, if demand is inelastic, consumers will still buy relatively the same amount despite the tax, leading to a smaller deadweight loss and a more efficient market outcome.