Relationship between tax revenues, deadweight loss, and demandelasticity

The government is considering levying a tax of $60 per unit on suppliers of either concert tickets or bus passes. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for concert tickets is shown byD

C

D

C

(on the first graph), and the demand for bus passes is shown byD

B

D

B

(on the second graph).

Suppose the government taxes concert tickets. 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 ($60 per ticket).

On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for concert tickets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax.

Concert Tickets Market 120 110 Supply S+ Tax 100 Tax Revenue 90 80 Deadweight Loss 70 PRICE (Dollars per ticket) 60 DC 50 40 30 20 10 0 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Tickets)Instead, suppose the government taxes bus passes. 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 ($60 per pass). 0n the following graph, do for bus passes the same thing you did previously on the graph for concert tickets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for bus passes. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. (9 Bus Passes Market 120 Tax Revenue $4:- Deadweig ht L055 110 100 90 BO 70 60 50 40 PRICE (Dollars per pass) 30 20 10 0 I I I I I I I I I I I I 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Passes) 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) Concert tickets at $60 per ticket Bus passes at $60 per pass 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 v because, all else held constant, taxing a good with a relatively V elastic demand generates larger tax revenue and smaller deadweight loss