3. Relationship between tax revenues, deadweight loss, and demand elasticity The

Question

3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by Di Con the first graph), and the demand for smartphones is shown by Ds (on the second graph) Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S+Tz) shifted up by the amount of the proposed tax ($120 perjacket) On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for leather jackets. Then use the black triangle (plus symbo/s) to shade the area that represents the deadweight loss associated with the tax. Leather Jackets Market 240 Supply S+Tax 2lI 180 160 Tax Revenue Deadweight Loss i 140 100 - 40

Explanation / Answer

Tax on leather jackets:

After tax: customers pay :$160

but producers receive only $40 (Just draw tangent down)

Therefore govt. receives the difference of $120 per unit. Now demand has come down to 100 units

hence total tax collections is : 120*100= $ 12000

Welfare loss: 1/2 base *height (Area of a triangle created)

60*250= $15000

Tax on smartphone:

After tax: customers pay :$220

but producers receive only $100 (Just draw tangent down)

Therefore govt. receives the difference of $120 per unit. Now demand has come down to 250 units

hence total tax collections is : 120*250= $ 30000

Welfare loss : 60*100= $6000

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