Friday, March 10, 2006

Taxes

Suppose the government raises $100 million through a $0.01 tax on widgets, and another $100 million through a $0.10 tax on gadgets. If the government doubled the tax rate on widgets and eliminated the tax on gadgets, would it raise more, less, or the same amount of money as before?

6 comments:

amepham said...

Wouldn't the amount of money raised depend on how many widgets and gadgets are sold. If more gadgets are sold then doubling the widget tax would cause a loss in money. But if a widgets sold significantly more than doubling the tax might increase money earned.

forsnic said...

since the tax on widgets would only increase by $0.01 the amount would increase money only slightly. if no tax was on gadgets then a lot of money would be lost to DWL because it is a big tax and it would reduce CS and PS as well.

KM said...

Yes, you need the Q.

Since the problem tells you the amount of money they made, you have the quantity.

And you're on the right track. :)

Reid said...

Well, I know that the laffer curve is a bunch a hoowie, but I think it probably explains what I'm thinking. What we need to know is how much people are willing to pay for taxes on the widgets. If that one cent tax is the max that people are willing to pay, then doubling that amount for the tax will effect wheather or not peple will buy the widgets because people will begin to look for substitutes. So oringially I would say that they would get another 100 million to, which makes up for the 100 million lost from the gadgets, but it all depends on what people will pay.

Reid said...

Widgets are considered to be a renewable resource too right, because if you sell too many of them then the supply goes down and then the price goes up. I'm thinking too much.

KM said...

You have it - excellent points!

Reid - yes, it would be renewable, but a great point on the amount people are willing to pay in taxes.