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

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 sers a tax of $$0,$$$20,$$$40,$$$50,$$$60,$$$80,$ or $$100$ per bottle. $($Hint: To find the equilibrium quantity

after the tax, adjust the "Quantity' field until the Tax 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.

Suppose the government is currently imposing a $$60-$per$-$bottle tax on vodka.

True or False: The government can raise its tax revenue by decreasing the per$-$unit tax on vodka.

True

False

Consider the deadweight loss generated in each of the following cases: no tax, 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 $\frac{1}{2}$ Base $$ 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.$)$