Question

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    (on the first graph), and the demand for bus passes is shown by    (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 shifted up by the amount of the proposed tax ($60 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.

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 the same thing that you did 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.

Answer 1

Tax on concert tickets: Before tax is imposed on the concert tickets, the number of tickets demanded and supplied is 350. After tax of S60 is imposed, the new supply curve intersects the demand curve at the quantity level of 100 units. Tax revenue and deadweight loss associated with the imposition of tax are shown in the following figure. Concert Tickets Market 120 110 100 90 Supply S+Tax Tax Revenue Deadweight Loss 70 60 e 50 20 10 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Tickets) Tax revenue is $6,000 (- tax per unit x no of units sold- 60 x 100) Deadweight loss as shown by the area shaded black is $7,500 [- (1/2) (80 - 20) (350 - 100)] Tax on bus tickets: Before tax is imposed on the bus tickets, the number of tickets demanded and supplied is 350. After tax of S60 is imposed, the new supply curve intersects the demand curve at the quantity level of 250 units. Tax revenue and deadweight loss associated with the imposition of tax are shown in the following figure. Bus Passes Market 120 110 100 90 Supply Tax Revenue Deadweight Loss o 70 60 e 50 40 30 20 10 02 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Passes) Tax revenue is $15,000 (- tax per unit x no of units sold- 60 x 250) Deadweight loss as shown by the area shaded black is $3,000 [= (1/2) (110-50) (350-250)] The government should tax bus tickets, because, all else held constant, taxing a good with a relatively less elastic demand generates larger tax revenue and smaller deadweight loss.