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economic efficiency of this tax

Question 3:
In an effort to collect more revenue, the city of New York is considering imposing a $4 per ticket surcharge on ride tickets for "The Beast" watercraft at the South Street Seaport. (For simplicity, we will ignore the availability of Beast Rides at Pier 86 on West 42nd St.)

The Independent Budget Office has supplied the Mayor's office with the following information regarding the demand and supply equations for Beast tickets at the South Street Seaport. (You can confirm that at the initial equilibrium, the price elasticity of demand for Beast rides is -1.0, and that the price elasticity of supply for Beast rides is +1.0.)

(see attached file)

3.1 In a graph with quantity of tickets sold on the horizontal axis and ticket price on the vertical axis, characterize the effect of the $4 per ticket surcharge on Beast rides on the following economic variables: equilibrium quantity after the tax; the price consumers pay; the price suppliers; the deadweight loss arising from the tax; and the tax revenue collected. (NOTE: For this part of the problem, you can simply sketch the graph, you do not have to worry about deriving exact numerical answers.)

3.2 Algebraically, solve for the new price per ticket riders (consumers) on the Beast must pay, and also the price received by Beast operators (suppliers), given the $4 per ticket surcharge and the elasticities of demand and supply from above.

3.3 Calculate the equilibrium quantity of tickets sold after the imposition of the $4 per ticket surcharge.

3.4 Given your answer to 3.3 above, calculate: the Deadweight Loss (DWL) arising from the tax; the revenue raised; and the DWL per dollar of tax revenue collected. Comment on the economic efficiency of this tax on Beast tickets.


Solution Summary

Specific Commodity Taxation in Competitive Market is considered.