Value Added Tax (VAT) is an indirect tax added to the price of most consumer goods and services in Colombia. The standard VAT rate was increased from 16% to 19%. Retail sales growth slowed down and consumer sentiment index scores fell following this policy change. In response to ongoing fiscal challenges, the Colombian government is considering a further increase in the standard VAT rate to 21%. Currently, essential goods such as fresh milk, rice, and vital medicines are zero-rated or exempt from VAT.
With reference to the information provided and your knowledge of economics, evaluate the usefulness of price elasticity of demand (PED) in helping the Colombian Government to decide whether to further increase the standard rate of VAT.
