1 the mayor is considering a 1 tax on each sale at lemonade...

1. The mayor is considering a $1 tax on each sale at lemonade stands or hot dog stands. Before the tax, suppose that lemonade and hot dogs have similar prices, quantities, and elasticity of supply; but the demand for lemonade is more inelastic. The mayor wants to raise as much tax revenue as possible while having suppliers pay most of the tax. You should advise her that A. she should tax lemonade stands. B. she should tax hot dog stands. C. she cannot achieve both goals taxing one good. D. she can tax either with the same effect as long as sellers are legally responsible.

Transcript

00:01 The province needs to raise money and the finance minister has a choice of imposing a lump sum sales tax of a same amount on one of two previously untaxed goods.

00:10 Good a and good b currently trade at the same price and quantity in their respective markets.

00:17 Assume the demand and supply of good a are more price elastic than demand and supply for good b.

00:23 So a is going to be more price elastic in both demand and supply.

00:33 And then b is less price elastic.

00:40 The finance minister wants to maximize tax revenue.

00:43 Which one should she tax? so a lump sum contract is going to basically be a tax on a contractor for the purchase of materials.

00:57 So you're basically taxing the contractor for purchases, so it's basically going to be sales tax.

01:07 Tax revenue is larger, the more inelastic the demand of supply are.

01:25 So therefore, the answer is b should be taxed because it is more inelastic.

01:33 If the finance minister wants to minimize deadweight loss, which good should she tax? so if demand is relatively inelastic, the deadweight loss is smaller.

01:49 So here, again, we should be taxing b.

01:55 B is relatively inelastic.

02:04 So if we tax that, dead weight loss goes down.

02:12 So let's take a look at a graph that illustrates this.

02:18 So deadweight loss is smaller when supply is inelastic.

02:31 So when supply is inelastic, what happens is that a change in price only leads to a small change in quantity.

02:45 So quantity does not change a lot with price.

02:48 So we have a steeper slope for the supply curve...