The Laffer curve
4. The Laffer curve Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for vodka, 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. Graph Input Tool 100 Market for Vodka 90 Supply Quantity (Bottles 48 80 Demand Price (Dollars per bottle) 60.00 Supply Price PRICE (Dollars per bottle) (Dollars per bottle) 40.00 70 Tax (Dollars per bottle) 20.00 60 50 30 Demand 10 0 0 12 24 36 48 60 72 84 96 108 120 QUANTITY (Bottles)Suppose the government imposes a $20-per-bottle tax on suppliers. At this tax amount, the equilibrium quantity of vodka is bottles, and the government collects $ in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. (Hint: To nd the equilibrium quantity after the tax, adjust the "Quantity\" eld until the Tax equals the value of the perunit 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. 2400 *- 2160 Laffer Curve 1920 1680 1440 1200 960 TAX REVENUE (Dollars) 720 480 240 0 I | | I | | I | | | D 1 0 20 30 4D 50 50 70 BO 90 1 00 TAX (Dollars per bottle) Suppose the government is currently imposing a $60-perbottle tax on vodka. True or False: The government can raise its tax revenue by decreasing the per-unit tax on vodka. 0 True 0 False Consider the deadweight loss generated in each of the following cases: no taxr a tax of $40 per bottle, and a tax of $80 per bottle. 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.) ('2) 2400 21 50 v Deadweight Loss 1920 _| d! m D 1440 _' 3 '3 '3 o DEADWEIGHT LOSS (Dollars) WI M 490 240 O 10 20 30 40 50 60 7D BU 90 100 TAX (Dollars per bottle) As the tax per bottle increases, deadweight loss V
