Suppose that the market for large, 64-ounce soft drinks in the town of Pudgyville is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. The market is initially in equilibrium with 1,000 soft drinks sold per day. The newly-elected Mayor of Pudgyville wants to tax 64-ounce soft drinks. She is considering either a $0.10 tax or a
$0.30 tax. Her chief economic advisor estimates that the number of soft drinks sold after a $0.10 tax will be 900 and after a $0.30 tax will be 500 . Which tax is better?
a. The $0.10 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.30 tax.
b. The $0.30 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.10 tax.
c. It is not clear which tax is better because although the $0.30 tax raises more tax revenues, it creates a larger deadweight loss than the $0.10 tax.
d. It is not clear which tax is better because although the $0.10 tax raises more tax revenues, it creates a larger deadweight loss than the $0.30 tax.
c
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