2. If the U.S. wants to maximize tax revenues, should we impose an excise tax on...

2. If the U.S. wants to maximize tax revenues, should we impose an excise tax on McDonalds or gasoline? Why? Make sure to include an elasticity graph for both firms and the equation for elasticity and your assumptions regarding the elasticity of demand for both products.

Expert Solution

Tax revenue is the result of tax per unit and the amount of the taxed products traded in the market. Tax revenue got from an item is higher when the tax lessens the amount by littler amount. We realize that a tax twists the market result by expanding the cost paid by purchasers, decreasing the price got by merchant and lessening the market quantity. In such manner, a tax that is utilized as an instrument to raise tax revenue, ought to be forced on those products and enterprises that experience the negligible decrease in market quantity.

Goods with inelastic demand are generally has a steeper demand curve which means that a tax would generate higher level of revenue as compared to the goods with an elastic demand. Inelastic demand states that the littler will be the decrease in market quantity, the larger will be the tax revenue.

As gasoline is an essential good, so the demand of gasoline must be inelastic while the demand for McDonalds would be elastic. Therefore, the government should implement tax on the good with inelastic demand since buyers won't have the option to decrease their level of quantity consumed and create more revenue.

As we can see in the figure, the tax revenue generated from implimenting a tax on a good with inelastic demand is higher than the the tax revenue generated from implimenting a tax on a good with elastic demand.

Tax revenue = Area (A + B)

Area (A+B) in inelastic demand > Area (A+B) in elastic demand

Rahul Sunny answered 1 year ago

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