Refer to the figure above. Suppose the government is considering levying a per unit tax of either $3 or $6 on this good.
1. What is the expected tax revenue generated when the tax is $3 and when it is $6? Explain. Be sure to use graphs.
2. What is the deadweight loss when the tax is $3 and $6? Explain. Be sure to use graphs.
3. How much is the total surplus when the tax is $3 and $6? Explain. Be sure to use graphs.
Homework Answers
When the tax levied is $3
Tax revenue = 15*3 = 45
DWL = 0.5*(20-15)*3 = 7.5
TS = CS+PS = 0.5*15+(12-6) + 0.5*15*(3-0) = 45+22.5 = 67.5
With the tax of $6
Tax revenue = 10*(8-2) = 60
DWL = 0.5*(20-10)*6 = 30
TS = CS+PS = 0.5*10*(12-8) + 0.5*10*(2-0) = 20+10 = 30
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