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Extra Credit

The document discusses the implications of tax policy on workers and revenue generation, emphasizing that the economic incidence of a tax depends on elasticity rather than who pays it. It highlights that while taxing inelastic goods like food can raise revenue with minimal deadweight loss, it disproportionately affects poorer households. Additionally, it illustrates how a per ticket tax at Fenway Park impacts the team's owners due to perfectly inelastic supply, resulting in a reduced revenue per ticket sold.

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25 views4 pages

Extra Credit

The document discusses the implications of tax policy on workers and revenue generation, emphasizing that the economic incidence of a tax depends on elasticity rather than who pays it. It highlights that while taxing inelastic goods like food can raise revenue with minimal deadweight loss, it disproportionately affects poorer households. Additionally, it illustrates how a per ticket tax at Fenway Park impacts the team's owners due to perfectly inelastic supply, resulting in a reduced revenue per ticket sold.

Uploaded by

ramii
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Government Extra Credit

ECON-200 Principles of Microeconomics

1. A senator wants to raise tax revenue and make workers better off. A staff member

proposes raising the payroll tax paid by firms and using part of the extra revenue to

reduce the payroll tax paid by workers. Would this accomplish the senator’s goal?

Explain.

This would not make a difference. The economic incidence of a tax depends on the

elasticity, not on who the government collects the tax from. If we see the first graph

sketched, the tax burden is the same for both parties. Therefore, it’s worse for the

workers. Otherwise, if the supply curve were more inelastic, we would accomplish

reducing that tax burden for the workers and they would be better off.

2. After economics class one day, your friend suggests that taxing food would be a good

way to raise revenue because the demand for food is quite inelastic. In what sense is
taxing food a “good” way to raise revenue? In what sense is it not a “good” way to raise

revenue?

According to the two graphs I sketched, you can see that if it was a normal product

(normal supply and demand) the Deadweight loss would be large. On one hand, if we do

the same graph but with an inelastic good, we can see that the deadweight loss is not that

big. Thanks to this little deadweight loss, a tax raises revenue. Also, thanks to the

inelastic demand, difference in quantity does not vary that much.

On the other hand, households will have to spend more money on supplying their

products and poorer people will struggle more.

3. At Fenway Park, home of the Boston Red Sox, seating is limited to about 38,000. Hence,

the number of tickets issued is fixed at that figure. Seeing a golden opportunity to raise

revenue, the city of Boston levies a per ticket tax of $5 to be paid by the ticket buyer.

Boston sports fans, a famously civic-minded lot, dutifully send in the $5 per ticket. Draw
a well-labeled graph showing the impact of the tax. On whom does the tax burden fall –

the team’s owners, the fans, or both? Why?

Because the supply curve is perfectly inelastic, the tax burden falls on the team’s owners.

The price paid by fans does not rise nut the team receives 5 bucks less per ticket.
4. Draw a supply-and-demand diagram with a tax on the sale of a good. Show the

deadweight loss. Show the tax revenue.

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