Supplementary Exercises > Demand, Supply and Markets

Seattle Espresso Tax

Seattle recently considered a new $0.10 tax on beverages containing espresso. Suppose that Seattle residents currently drink 30 million shots of espresso per year, and that an espresso drink costs $2.50.

  1. If the supply curve is perfectly elastic, what would be the effect of the tax if the elasticity of demand is -0.5? Calculate the following: the change in the price and quantity of espresso drinks; the change in consumer and producer surplus; the revenue raised by the tax; the deadweight loss; and the deadweight loss per dollar of tax revenue.
  2. The elasticity of demand for espresso is not known precisely. What would the effect of the tax be it the elasticity of demand were much higher, say -2.0 instead?
  3. Now suppose the supply curve is perfectly inelastic. Calculate the effect of the tax under that circumstance. Discuss how this case would differ from the previous two.


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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 08/17/2016