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1. Taxes and Efficiency The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply
1. Taxes and Efficiency The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by Dy (on the first graph), and the demand for smartphones is shown by Ds (on the second graph). Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S + Tax) shifted up by the amount of the proposed tax ($120 per jacket). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for leather jackets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Leather Jackets Market 240 220 S+ Tax Supply 200 Tax Revenue + Deadweight Loss PRICE (Dollars per jacket) 20 100 160 200 250 300 350 400 450 500 680 600 QUANTITY (Jackets) Instead, suppose the government taxes smartphones. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($120 per phone).On the following graph, do the same thing that you did on the graph for leather jackets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for smartphones. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Smartphones Market 240 220 S+Tax Supply 200 Tax Revenue 180 160 140 Deadweight Loss PRICE (Dollars per phone) 120 100 20 De 50 100 160 200 250 300 350 400 450 600 680 600 QUANTITY (Phones) Complete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals. Tax Revenue Deadweight Loss If the Government Taxes... (Dollars) ( Dollars) Leather jackets at $120 per jacket Smartphones at $120 per phone If the government wants to impose the tax that is more efficient, it should tax . (Hint: Assume the administrative burdens of the two tax laws are equal.)
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