Impact of tax on two commodities.

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Chapter 17, Problem 5TY

To determine

Impact of tax on two commodities.

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Revenue from tax is always greater than government spending in SouthAfrica;

Suppose the equilibrium quantity in the market for baby formula is 1,000 per month when there is no tax. Then a tax of $0.50 per bottle is imposed. The effective price paid by buyers increases from $2.50 to $2.90 and the effective price received by sellers falls from $2.50 to $2.40. The government’s tax revenue amounts to $475 per month. Which of the following statements is correct? A. After the tax is imposed, the equilibrium quantity of diapers is 900 per month. B. The demand for diapers is more elastic than the supply of diapers. C. The deadweight loss of the tax is $12.50. D. The tax causes a decrease in consumer surplus of $380.

Imagine that you work for the central bureaucracy and you need to raise revenue. You want to use a per-unit tax on some good. There are two possible goods. The current equilibrium price and quantity are the same for both goods. However, for good A, both the supply and demand are more elastic than for good B. The tax will be $1/unit regardless of which good you choose to tax. Which good will give you more revenue? Which one will be more efficient? Show this with two graphs. (You do NOT need to show the incidence on buyers and sellers to answer this question. These graphs should be pretty simple.....)