Question

4. The Laffer curve 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 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. Graph Input Tool Market for Adult DVDs 40 36 32 28 I Quantity Suppl 80 (DVDs) Demand Price (Dollars per DVD) Supply Price Dollars per DVD) 24.00 16.00

Answer 1

Suppose the government imposes $8 per DVD tax on suppliers.

As a result, the price buyers paid equals to $24 and price sellers receives equals to $16, At this tax amount, the equilibrium quantity of adult DVDs is 80 DVDs and government collects ($8)(80)= $640 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	100	0
8	80	640
16	60	960
20	50	1000
24	40	960
32	20	640
40	0	0

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

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

FALSE because the government cannot raise its tax revenue by increasing the per unit tax on adult DVDs . As we can see in the above table or graph ,that when tax is $24 per DVD ,then tax revenue =$960 and when tax is $32 ,then tax revenue is $640.

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
16	(100-60)=40	(0.5)(40)(16)= 320
32	(100-20)=80	(0.5)(80)(32)=1280

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

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