Governments often place so-called sin taxes on goods or services such as cigaret
ID: 1157217 • Letter: G
Question
Governments often place so-called sin taxes on goods or services such as cigarettes, alcohol, and pornography. These kinds of taxes are popular with politicians because they are usually more palatable to voters than income taxes To understand the effect of such a tax, consider the monthly market for adult DVDs, which is shown on the following graph. Use the graph input tool to help you answer the following questions. You wll 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 Market for Adult DVDs 40 l Quantity 80 32 28 24 20 (DVDs) Demand Price (Dolars per DVD) Tax Wedge (Dollars per DVD) Supply Price Dollars per DVD) 24.00 16.00 8.00 12 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (DVDs)Explanation / Answer
case 1: when tax=0
Here the supply price is $16 when the equilibrium price is $20. Therefore, the suppliers are incurring a loss of $(20-16)=$4.Similarly, the quantity sold is 80 when 100 could have been sold.
deadweight loss=1/2*base*height(using the area of a triangle formula)
1/2*4*20=40
Case 2: when the tax is $16
supply price=$16
add:tax=$16
demand price=$32
Therefore,the amount of loss in price obtained by suppliers due to tax =$(32-16)=$16
amount of reduction in quantity caused by tax=100-80=20
deadweight loss=1/2*16*20=160
Case 3: when tax is $32
supply price=$16
add:tax=$32
demand price=$48
Therefore,the amount of loss in price obtained by suppliers due to tax =$(48-16)=$32
amount of reduction in quantity caused by tax=100-80=20
deadweight loss=1/2*32*20=320
Remember:With an increase in tax the deadweight loss too increases.
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