The government is considering changing the tax rate.

a) What is the tax revenue from a tax of $t per unit? What is the deadweight loss

from a tax of $t per unit? Write these as a function of the tax t. It may be helpful

to draw a picture.

b) What is the marginal deadweight loss (MDWL) of an increase in the tax? What

is the marginal revenue (MR) of an increase in the tax?

c) Suppose that the government has complete control over air fare tax policy and is

willing to give up $4 of government revenue if it leads to at least a $3 reduction in

deadweight loss. What is the value of additional government revenue () in this

case? Use the Ramsey rule to nd the optimal per unit tax t?.

d) Suppose instead that two candidates announce air fare tax policies, the only

issue that matters to voters. There are 5 voters, each with distinct values of

= f0; 1

4 ; 1

3 ; 1

2 ; 5

6g. In equilibrium, which tax policies will each candidate choose?

Show your work and explain your reasoning!

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