1. Government Finance Answer Key
Homework #8
Government Finance
Answer Key

2. 1-8a. Excise Tax on Coffee D
In an excise tax, because coffee demand is fairly inelastic, any excess burden will mostly be carried by consumers. However, excess burden will be fairly minimal because of coffee demand’s inelasticity. P
Dead weight loss or
total excess burden on
consumer and producer
Tax Revenue S Q

3. 1-8b. Excise Tax on Fine China and Crystal
In an excise tax, because fine china and crystal demand is fairly elastic, and assuming supply is also fairly elastic, excess burden is very high on both consumers and producers. P
Dead weight loss or
total excess burden on
consumer and producer S
Tax Revenue D Q

4. 1-8c.
Excise Tax on a Product Produced by a Monopolist
The excess burden is large because a monopolist operates in the elastic part of the demand curve. In the inelastic part of the demand curve, marginal revenue is negative and therefore the monopolist would never produce that amount.

5. 1-8d. Excise Tax on Health Care Services D S1
I’ve assumed demand for health care services to be completely inelastic because consumers will need health care no matter what the cost. Because demand is perfectly inelastic, when an excise tax is place on health care services, there is no excess burden. The supply curve shifts up the amount of the tax, and all consumers continue to consume health care services at the new price. This means tax revenue is created with no loss in welfare. P
Tax Revenue S
No excess burden Q