Question

Suppose the government is reviewing three different tax proposals with the intention of implementing only one. They are as follows: I. Levy a tax on the buyers sports cars II. Levy a tax on the sale of cigarettes III. Levy a tax on prescription medications a. Which tax policy should the government adopt if they seek to maximize government revenue? Explain.

Answer 1

Taxes on cigarettes can be an effective way for the government to maximize revenue, as long as they do not significantly reduce consumption. The government should carefully consider the impact on consumer behavior and the quantity sold when selecting a tax policy.

Step-by-step explanation:

When considering which tax policy the government should adopt to maximize revenue, it is important to analyze the behavior of residents and consumers. Taxes on cigarettes are an effective way to raise tax revenue for the government because they serve the dual purpose of generating revenue and discouraging cigarette consumption. If a higher cigarette tax does not significantly reduce consumption, it will actually raise more tax revenue for the government. However, if it discourages consumption considerably and reduces the quantity of cigarette sales, then the tax will not raise much revenue. Therefore, the government should adopt a tax policy that maximizes revenue by carefully considering the impact on consumer behavior and the quantity sold.