Question

Governments often place so-called sin taxes on goods or services such as cigarettes, alcohol, and pornography. These kinds of taxes are popular with politicians because they are usually more palatable to voters than income taxes. To understand the effect of such a tax, consider the monthly market for adult DVDs, which is shown on the following graph.

Graph Input Tool Market for Adult DVDs 40 36 T 32 80 (DVDs) Demand Price (Dollars per DVD) 16.00 28 (Dollars per DVD) Tax Wedge (Dollars per DVD) 20 12 mand 2. 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (DVDs)

Suppose the government is currently imposing a $24-per-DVD tax on adult DVDs.

Answer 1

At $8 tax amount, the equilibrium quantity of adult DVDs is 80 DVDs, and the government collects $640= (8*80)

TAX(Dollars per DVD)	TAX REVENUE (Dollars)
0	0
8	640
16	960
20	1000
24	960
32	640
40	0

TAX REVENUE (Dollars) 1100 1000 900 800 600 500 400 300 200 100 0 4 812 1620 24 28 32 3 4044 TAX (Dollars Per DVD)

False. From the above graph we can see that at $24, the revenue decreases, so it cannot increase revenue by raising tax

DEADWEIGHT LOSS(Dollars)=1/2*tax*change in Q

TAX(Dollars per DVD)	DEADWEIGHT LOSS(Dollars)
0	0
16	320
32	1280

1440 1280 1120 960 8 800 640 a 480 a 320 160 4 12 16 20 24 28 32 36 TAX(Dollars per DVD)

Increases by a greater and greater amount