3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $120 per unit on suppliers of either pickleball paddles or metro cards. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for pickleball paddles is shown by Dp (on the first graph), and the demand for metro cards is shown by Dy, (on the second graph). Suppose the government taxes pickleball paddles. 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 paddle). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for pickleball paddles. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Pickleball Paddles Market 240 + 220 + Supply S+Tax 200 Tax Revenue 180 i! Deadweight Loss 140 + 120 80 -+ PRICE (Dollars per paddle) 60 + 40 + 20 -+ 0 A 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Paddles) Instead, suppose the government taxes metro cards. 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 card). On the following graph, do for metro cards the same thing you did previously on the graph for pickleball paddles. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for metro cards. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. a2 @ Metro Cards Market 240 + 220 + Supply S+Tax 200 1 Tax Revenue 180 + ! 160 Deadweight Loss 140 + 120 1 100 + PRICE (Dollars per card) 60 T 20 T DM o WLy N 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Cards) 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) Pickleball paddles at $120 per paddle Metro cards at $120 per card Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax W because, all else held constant, taxing a good with a relatively W elastic demand generates larger tax revenue and smaller deadweight loss