Explanation:
Close
A.
For a given supply curve, a more inelastic demand is associated with higher tax revenues and lower deadweight loss.
When a good has relatively inelastic demand, this means that a change in price does not result in a large change in
quantity. In other words, consumers are not very responsive to changes in price. Therefore, a tax on a good with
relatively less elastic demand does not significantly change consumer behavior. The equilibrium quantity after the tax
is only slightly lower than the equilibrium quantity before the tax. As seen in the above figures, taxing cell phones
yields $20,000 in tax revenue and $2,000 in deadweight loss, while taxing leather jackets yields only $12,000 in
revenue and $6,000 in deadweight loss.
Points:
10
jl
Average:
10/10

13. Tax revenues, deadweight loss,and demand elasticity
The government is considering levying a tax of $80 per unit on either leather jackets or cell phones. The supply curve
for each of these two goods is identical and is shown by S. The demand for leather jackets is shown by
01
(on the
top graph), and the demand for cell phones is shown by
02
(on the bottom graph).
Supposethe government were to tax leather jackets. 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 tax ($80 per unit).
Usethe green rectangle (triangle symbols) to shade the area that represents tax revenue. Then use the black
triangle (X symbols) to shade the area that represents the deadweight loss (OWL) associated with the tax.

Answer
PRICE (Dollars
per jacket)
PRICE [Dollars
per jacket)
240
Gov', Revenue
240
5
+
Tax
5
"
5
+
Tax
5
200
200
Deadweight
Loss
160
"
160
/::;.
)(
/::;.
)(
120
120
X
80
80
01
01
/::;.
)(
L:!.
)(
40
40
a
Explanation:
100
200
300
400
500
600
QUANTITY (jackets
per year)
I
Clear
All
I:
Help
I
a
100
200
300
400
500
600
QUANTITY (Jackets
per year)
Close
A
The $80 tax reduces the quantity sold in the market from 300 jackets to 150 jackets (the intersection of the 01 and
S
+
Tax curves). At this quantity, the price buyers pay is $140 per unit, and the price sellers receive is $60 per unit.
The difference between the two values represents the $80 tax that is paid by the seller.
Tax revenue is the per-unit tax rate multiplied by the number of items exchanged. Visually, total tax revenue is
represented by a rectangle extending from the vertical axis to the equilibrium quantity of 150 jackets, and from the
price sellers receive ($60) to the price buyers pay ($140). The area of that rectangle is:
Per-Unit Tax Rate x Quantity Exchanged
$80 per jacket x 150 jackets
$12,000
Deadweight loss is the loss in total welfare that results from the tax. It can be calculated as follows, where CS stands
for consumer surplus and PSstands for producer surplus:
Deadweight Loss
=
Total Welfare Before Tax - Total Welfare After Tax
=
(CS Before Tax
+
PSBefore Tax) - (CS After Tax
+
PSAfter Tax
+
Tax Revenue)
Visually, the deadweight loss is represented by the triangle between the supply curve and the demand curve and
between the quantities of 150 jackets and 300 jackets. The area of this triangle is 1/2 x (300 jackets - 150 jackets) x
($140 per jacket - $60 per unit)
=
$6,000.