Question

4. The Laffer curve 

Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for cigarettes, which is shown on the following graph. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Answer 1

Suppose the government imposes $4 per pack tax on suppliers.

As a result, the price buyers paid equals to $12 and price sellers receives equals to $8, At this tax amount, the equilibrium quantity of cigarettes is 56 Packs and government collects ($4)(56)= $224 in revenue.

To plot the laffer curve, we have to calculate the tax revenue at different tax rates, this is shown in the following table:

Tax	Quantity after tax	Tax revenue
0	70	0
4	56	224
8	42	336
10	35	350
12	28	336
16	14	224
20	0	0

By plotting these points, we get the laffer curve as shown below:

Tar fevenue (Dellars) S01 Lffer arrve 162 12 56 2 4b8 10 12 14 16 1 9. 7ar (Dallrs per paue

Suppose the government is currently imposing a $8 per per pack tax on cigarettes.

TRUE because the government can raise its tax revenue by increasing the per unit tax on cigarettes. As we can see in the above table or graph ,that when tax is $8 per pack ,then tax revenue =$336 and when tax is $10 ,then tax revenue is $350.

Deadweight loss is the area of the triangle = (0.5)(Reduction in quantity after tax)(Tax amount)

Tax	Reduction in quantity	Deadweight loss
0	0	0
8	(70-42)=28	(0.5)(28)(8)= 112
16	(70-14)=56	(0.5)(56)(16)=448

By plotting these points ,we get the deadweight loss curve as shown below:

Desd eight loss (allers) 448 312 336 Pendusei ght २२५ 758 1172 56 0 ২ ५ । १ (० ।2।५ /6 ।1१ ठ Tan (Delars per pack)

As the tax per pack increases,the deadweight loss increases by greater and greater amount as shown in the figure above.