26 Jul CONSIDER FOR EXAMPLE THE MARKET FOR ADULT DVDS SHOWN BY THE FOLLOWING GRAPH INPUT TOOL.
The Laffer curve Governments often place sin taxes on undesirable goods or services such as cigare Show more The Laffer curve Governments often place sin taxes on undesirable 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. Taxing a so-called bad product is an easy way to generate extra government revenue. However as youll see in this question raising sin taxes doesnt always generate more tax revenue. Consider for example the market for adult DVDs shown by the following graph input tool. The orange curve represents supply and the blue curve represents demand. 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. Using the graph input tool the equilibrium quantity of adult DVDs when the government imposes an $8-per-DVD tax on suppliers is (20000 DVDs/30000 DVDs/40000 DVDs/50000 DVDs) and the government collects ($200000/$320000/$480000/$640000) in tax revenue. (Hint: To see the impact of the tax enter the value of the tax in the Tax field and then move the green line to the after-tax equilibrium by entering the after-tax equilibrium quantity in the corresponding box. Then enter 0 in the Tax field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the process from the previous question to fill in the following table. Tax (T) Quantity Sold (Q) Tax Revenue (T x Q) (Dollars) (Number of DVDs) (Dollars) 0 50000 0 8 16 20 24 32 40 0 0 Using the data from the previous table and the green points (triangle symbol) on the following graph plot a Laffer curve to show the total government tax revenue at each of the tax levels in the table. You can calculate the tax rate using the formula . For example an $8-per-DVD tax raises the equilibrium price to $24. Therefore an $8-per-DVD tax corresponds to a tax rate of . Be sure to plot the points in order from left to right. Line segments will automatically connect the points. Show less
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