15. The Laffer curve Governments often place so-called sin taxes on goods or services such as cigarettes and alcohol. 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 rum, 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 Rum Supply Quantity 80 (Bottles) Demand Price 24.00 Supply P (Dollars per bottle) 16.00 (Dollars per bottle) Tax Wedge 8.00 (Dollars per bottle) PRICE (Dollars per bottle) emand 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Bottles) Suppose the government imposes an $8-per-bottle tax on suppliers. At this tax amount, the equilibrium quantity of rum is bottles, and the government collects $ in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $8, $16, $20, $24, $32, or $40 per bottle. (Hint: To find the equilibrium quantity after the tax, adjust the "Quantity" field until the Tax Wedge equals the value of the per-unit tax.) Using the data you generate, plot a Laffer curve by using the green points (triangle sy e at each of those tax levels. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. (?) 1600 1440 Laffer Curve 1280 1120 960 TAX REVENUE (Dollars) 800 640 480 320 160 12 16 20 24 28 32 36 TAX (Dollars per bottle) Suppose the government is currently imposing a $24-per-bottle tax on rum. True or False: The government can raise its tax revenue by increasing the per-unit tax on rum. True False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $16 per bottle, and a tax of $32 per bottle. On the following graph, use the black curve (plus symbols) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a triangle is equal to 5 X Base X Height. In the case of a deadweight loss triangle found on the graph input tool, the base is the amount of the tax and the height is the reduction in quantity caused by the tax.) Problem set 2 X the height is the reduction in quantity caused by the tax.) ? 1600 1440 1280 Deadweight Loss DEADWEIGHT LOSS (Dollars) 5 8 8 8 8 8 160 8 12 16 20 28 32 36 40 TAX (Dollars per bottle) As the tax per bottle increases, deadweight loss