Question

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are...

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20-cent per donut tax, which would decrease donut sales by 100,000 per day; and a 50-cent per donut tax, which would decrease donut sales by 150,000 donuts per day.

a) Calculate the amount of tax revenue generated by each tax and the deadweight loss caused by each tax.

b) If the goal of your state government is simply to raise the most tax revenue, which tax is preferable?

c) If the goal of your state government is to raise tax revenue in the most efficient manner (with the least deadweight loss per dollar of revenue), which tax is preferable?

d) What other goals might your state government have when creating this kind of tax besides raising tax revenue?

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