The City of Greenville needs to raise revenue. Alderman Black has proposed a $10 tax on red cars in the city, currently numbering 2,000 . Mayor White, who wants more than $20,000 in revenue, proposes taxing these cars at $100 each. Councilwoman
Bluestone goes even farther, suggesting a $1,000 per red car tax, arguing that her proposal will raise $2 million. If maximizing tax revenue is the only consideration, which proposal should pass? Why?
It is an economic fact that if you tax something you get less of it. Even at $10 per car, some people will decide not to drive red cars (by selling or painting their vehicles). Suppose 100 people do this. Alderman Black's proposal will then yield $19,000 . At $100 per red car, there will be a lot fewer red cars. But as long as more than 190 people elect to keep their cars red, the mayor's proposal will raise more revenue. A $1,000 tax would only require more than 19 red cars to generate more revenue than the $10 tax. However, at such a high fee, it is likely that no red cars will remain in Greenville.
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Figure 3.2 Supply and Demand
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