Governments often place so-called sin taxes on goods or services such as cigarettes, alcohol, and pornography. These
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. Suppose the initial tax on suppliers is set at zero dollars per DVD.
Suppose the government imposes an $8-per-DVD tax on suppliers.
At this tax rate, the equilibrium quantity of adult DVDs is (______) DVDs, and the government collects ($_____) in tax revenue.
Suppose the government is currently imposing a $24-per-DVD tax on adult DVDs.
Consider the dead weight loss generated in each of the following cases: no tax, a tax of $16 per DVD, and a tax of $32 per DVD.
Required:
Calculate the government's tax revenue if it sets a tax of $0, $8, $16, $20, $24, $32, or $40 per DVD. Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels.