Question

Homework (Ch 08) 3. Relationship between tax revenues, deadweight loss, and demandelasticity The government is considering levying a tax of $60 per unit on suppliers of either concert tickets or bus passes. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for concert tickets is shown by Dc (on the first graph), and the demand for bus passes is shown by Ds (on the second graph). Suppose the government taxes concert tickets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S + Tax) shifted up by the amount of the proposed tax (560 per ticket). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for concert tickets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Concert Tickets Market Tax Raven Deadweight Loss PRICE(Dolors per

Answer 1

Ans) Taxing a good with relatively less elastic demand, helps government to raise more revenue with lower welfare loss.

Concert Tickets Market Supply Tax Revenue * = lxb = 60x100 =6000 A-lxbxh= 1x 60 x(350-100) = 30X250 Deadweight Loss ada TAX 7,500 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Tickets) Instead, suppose the government taxes bus passes. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($60 per pass). On the following graph, do for bus passes the same thing you did previously on the graph for concert tickets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for bus passes. Then, use the black triangle plus symbols) to shade the area that represents the deadweight loss associated with the tax.

Homework (Ch 08) On the following graph, do for bus passes the same thing you did previously on the graph for concert tickets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for bus passes. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Bus Passes Market Supply Tax Revenue 1 E-Lyb=60x250 = 15,000 =hxbxh= 1 x60x(350-250) = 30x100 Deadweight loss PRICE Doors per pass) = 3000 0 050 200 250 3000 QUANTITY (Passes)

PRICE (Dollars per 38 39 & 9 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Passes) Complete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals. If the Government Taxes... Concert tickets at $60 per ticket Bus passes at $60 per pass Tax Revenue (Dollars) 6000 15000 Deadweight Loss (Dollars) 7500 3000 Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax bus pass because all else held constant, taxing a good with a relatively less elastic demand generates larger tax revenue and smaller deadweight loss.