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 by (on the first graph), and the demand for bus passes is shown by (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 ( ) 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.
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).
On the following graph, do the same thing that you did 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 dead weight loss associated with the tax.
Complete the following table with the tax revenue coffected and dead weight ioss caused by each of the tax proposals.
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………………. because, all else held constant, taxing a good with a relatively ………….. elastic demand generates larger tax revenue and smaller dead weight loss.
