The figure below is the graph of the demand function D, the supply function S, and the supply function after a $30 tax T for the same product. Is it possible for the government to earn no money if it keeps increasing taxes on this product?

Question

The figure below is the graph of the demand function D, the supply function S, and the supply function after a $30 tax T for the same product. Is it possible for the government to earn no money if it keeps increasing taxes on this product?
​

Quizplus · Accepted Answer

It is possible for the government to earn no money if it keeps increasing taxes on this product. This can happen if the tax causes a decrease in the quantity demanded and the decrease in demand is greater than the increase in price due to the tax, resulting in a decrease in the total amount of tax revenue collected. In other words, the government may hit a point where increasing the tax rate further would result in a decrease in revenue collected. This is known as the Laffer curve.

The Figure Below Is the Graph of the Demand Function