Less/ more 3. Relationship between tax revenues, deadweight loss, and demandelas

Question

Less/ more 3. Relationship between tax revenues, deadweight loss, and demandelasticity The government is considering levying a tax of $30 per unit on suppliers of either jeans or allergy medication. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for jeans is shown by D (on the first graph), and the demand for allergy medication is shown by DA (on the second graph). Suppose the government taxes jeans. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S+Tax) shifted up by the amount of the proposed tax ($30 per pair). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for jeans. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax

Explanation / Answer

In this case, it should tax allergy because, all else held constant, taxing a good with a relatively less elastic demand generates larger tax revenue and smaller deadweight loss.

Taxes Revenue DWL Jeans 1500 625 Allergy 6000 1000

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