Until last year, there was no tax on concert tickets. The City is eager to raise some tax revenue by imposing a tax on concert tickets. But as you learned in Chapter 6, a tax on concert tickets will reduce the number of tickets sold and cause deadweight losses.
The City Council has decided to balance the two opposing effects of a tax (Tax Revenue and Deadweight Loss) by using a measure of social welfare as
Social Welfare = (Tax Revenue – Deadweight Loss)
Determine the amount of tax the City should impose on concert tickets to maximize the Social Welfare from the tax on concert tickets.
Comment on the adequacy of this measure of Social Welfare. Can you describe another measure of welfare? Which measure is better and why,
Hint: Calculate the Tax Revenue and Deadweight Loss corresponding to Tax amounts of $1, $2, $3, $4 etc. and find which tax amount that maximizes Social Welfare.