--%>

Case study of Espresso Tax

Seattle is currently considering a 10-cent tax on espresso drinks to pay for pre-school and day-care programs. The legislation’s sponsor, Rep. Burbank, argues that people who spend $3-5 on exotic espresso based coffee drinks can afford – and will be “happy to pay” - an extra dime for kids.  But coffee shop owners have been fighting the tax.  Jeff Babcock, owner of Zoka Coffee, staged a rally in protest this month. He says “It’s not a luxury item as far as the culture here.  It’s a cold, wet, damp environment. Coffee’s big, and everyone loves their lattes.”  Zoka says most of his customers are liberal, and tend to support government spending, but that they oppose the Espresso tax. “They just think it’s a crazy tax,” he says.

The Seattle ballot measure (Prop 77) would not tax regular drip coffee, only espresso drinks. Proponents of the tax say it will raise “at least $6.5 million a year,” while a more conservative City Council estimate says annual revenue will likely top out at $3.5 million.

Use these facts in considering the following questions:
- The population of Seattle is 572,000
- Only half the people in Seattle drink any espresso drinks.  Among those who do, the average person drinks 230 espresso drinks per year.
- The average espresso drink costs $4.00
- Competition among coffee shops is so intense that the price of $4/drink covers only the cost of rent, labor, materials, and normal return on capital. As a result, no coffee shop is willing to sell espresso drinks unless they realize at least $4 in revenue / drink.  As a result, the tax will have the net effect of increasing the price of espresso drinks to $4.10.

Questions:

1. If the City Council’s revenue projection is accurate, what, to the nearest hundredth, is the value of the own price elasticity of demand for espresso drinks?  Show your work.

2. Assuming the Council’s $3.5 million revenue estimate is accurate; estimate the deadweight loss that would result from the imposition of the tax.  Show your work.

3. What is the ratio of the deadweight loss to the amount of revenue raised by the tax?

   Related Questions in Financial Accounting

  • Q : Explain Cost of goods Explain Cost of

    Explain Cost of goods and how they are used in estimating gross profit and net profit of the business?

  • Q : Prepare the journal entry to record the

    The Webster Company uses the aging method to estimate the allowance for doubtful accounts. The following schedule of accounts receivable was prepared as at December 31, 20x6: Age Balance % uncollectible 0-30 days $674,000 0.5% 31-60 days 186,000 1.2% <

  • Q : Case study of a global economy The

    The economic recovery is seemingly on track and in fact strengthened during the first half of 2010. The global financial market however, suffered a setback with the turmoil in sovereign debt markets leading to sharp currency movements. The extent of recovery varies ac

  • Q : Describe Short Holding Period Describe

    Describe Short Holding Period briefly with suitable example?

  • Q : Corruption of Creativity Explain the

    Explain the Corruption of Creativity in Creative Industry ? Explain in brief.

  • Q : Advantages and disadvantages of FDI

    State advantages and disadvantages of FDI as opposed to the licensing agreement with the foreign partner?

  • Q : Capital budgeting analysis State some

    State some of the problems which may enter into capital budgeting analysis in case project debt is computed rather than borrowing capacity made by the project?

  • Q : Guidelines for effective communication

    Define and explain the four guidelines for effective communication in families. Give examples to describe each guideline.

  • Q : Variants of basic interest rate and

    Discuss briefly some of the variants of the basic interest rate and currency swaps.

  • Q : Report on Digital Marketing Strategy

    Working individually you are required to produce a 2000 word report based on promoting the website you developed. (Your main objective is to increase the volume of traffic to your website).You should justify the best digital communication tools and criticall