Most states tax the purchase of new cars. Suppose that Victoria currently requires car dealers to pay the state $100 for each car sold and plans to increase the tax to $150 per car next year.

a Illustrate the effect of this tax increase on the quantity of cars sold in Victoria, the price paid by consumers and the price received by producers.

b Create a table that shows the levels of consumer surplus, producer surplus, government revenue and total surplus both before and after the tax increase.

c What is the change in government revenue? Is it positive or negative?

d What is the change in deadweight loss? Is it positive or negative?

e Give one reason that the demand for cars in Victoria might be fairly elastic. Does this make the additional tax more or less likely to increase government revenue? How might states try to reduce the elasticity of demand?