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3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $25 per unit on suppliers of ether
3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $25 per unit on suppliers of ether windbreakers or bucket hats. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for windtreakers is shown by Dw (on the first graph), and the demand for bucket hats is shown by Dn (on the second graph). Suppose the government taxes windbreakers. The following groph shows the annual supply and demand for this good, It also shows the supply curvg (S+Tax) shifted up by the amount of the proposed tax ( $25 per windbreaken). On the following graph, use the green rectangle (triangle symbols) to shade the drea that represents tax revenue for windtoreakers. Then use the black triangle (plus symbols) to shade the area that represents the deadweight foss associated with the tax. Compiete the following table with the tax revenue collected and deadweight loss caused by cach of the tax proposals. 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 because, all else held constant, taxing a good with a relatively. elastic demand generates larger tax revenue and smaller desdweight loss. Instead, suppose the government taxes bucket hats, The following graph shows the annusi supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ( $25 per hat). On the following graph, do for bucket hats the same thing you did previously on the graph for windbreakers. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for bucket hats. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax
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