4. 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 cigarettes, 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. PRICE (Dollars per pack) 18 Supply 10 14 12 10 " 0 2040 Demand 100 120 140 100 100 200 QUANTITY (Packs) Graph Input Tool Market for Cigarettes Quantity (Packs) 80 Demand Price (Dollars per pack) 12.00 Supply Price (Dollars per pack) 8.00 Tax Wedge (Dollars per pack) 4.00 ? Suppose the government imposes a $4-per-pack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is 192 packs, and the government collects $4 in tax revenue. Now calculate the government's tax revenue if it sets a tax of 50, $4, $8,]$10, $12, $16, or $20 per pack. (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 symbol) to plot total tax revenue 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. TAX REVENUE (Dollars) 800 120 040 400 320 240 100 TAX (Dollars per pack) " 18 Laffer Curve DEADWEIGHT LOGO (D) Suppose the government is currently imposing a $12-per-pack tax on cigarettes True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes True False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $8 per pack, and a tax of $16 per pack 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 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.) 729 Deadweight Loss 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 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.) DEADWEIGHT LOSS (Dollars) 800 720 540 500 450 400 320 240 140 2 4 10 12 14 20 TAX (Dollars per pack) As the tax per pack increases, deadweight loss Deadweight Loss Grade It Now Save & Continue