3. Relationship between tax revenues, deadweight loss, and demandelasticity

The government is considering levying a tax of $80 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 byD

L

DL(on the first graph), and the demand for smartphones is shown byD

S

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

S+Tax) shifted up by the amount of the proposed tax ($80 per jacket).