Question

3. Relationship between tax revenues, deadweight loss, and demand elasticity

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 D_C (on the first graph), and the demand for bus passes is shown by D_B (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 ($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 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.

Complete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals.

	Tax Revenue (Dollars)	Deadweight Loss (Dollars)
If the Government Taxes...
Concert tickets at $60 per ticket

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 _______  because, all else held constant, taxing a good with a relatively _______  elastic demand generates larger tax revenue and smaller deadweight loss.

Answer 1

Concert Tickets Market Supply S+Tax Tax Revenue Deadweight Loss PRICE (Dollars per ticket) 0 A 0 50 100 + 150 200 250 300 350 400 450 QUANTITY (Tickets) 500 550 600

Bus Passes Market Supply SA Tax Tax Revenue Deadweight Loss PRICE (Dollars per pass) 0 50 100 150 500 550 600 200 250 300 350 400 450 QUANTITY (Passes)

Govt taxes	Tax revenue	DWL
Concert tickets	100*(80-20) = 6000	0.5*(350-100)*(80-20) = 7500
Bus passes	250*(110-50) = 15000	0.5*(350-250)*(110-50) = 3000

Blanks-

1) bus pass market

2) lower