Reference no: EM132196746

Question: Assume the following:

The government needs to more revenue by introducing a new tax on video games. There are two games CRGs (Car racing games) and RPGs (role playing games);

Producers of CRGs do not produce RPGs and never will and; producers of RPGs do not produce CRGs and never will;

Consumers of CRGs do not consume RPGs and never will and; consumers of RPGs do not consumer CRGs and never will;

The supply functions of both CRGs and RPGs are very similar; and

The demand for CRGs is own-price elastic, whereas, the demand for RPGs is own-price inelastic.

Use the information above to answer the following questions:

a) Using diagrams, illustrate the impact of an identical tax placed on CRGs and RPGs by the government on each type of video game and consider the effects on the quantity consumed, consumers and producers for both products and the associated dead weight loss.

b) If the government wants to raise a particular level of revenue in a way which minimises dead weight loss then should CRGs and RPGs be taxed similarly or, if not, which should be taxed more? Explain your answer.

c) Are the taxes discussed in part b) above fair or not? Explain your answer.