--%>

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 : Bankruptcy A legal process that allows

    A legal process that allows a debtor, either a person or a business, to redundant some or all of the debt. The normal process involves selling asset and using the proceeds to pay off creditors in an order and/or in an amount determined by a judge. Some types of bankru

  • 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 : Parallel and back-to-back loan

    Distinguish between the parallel loan and the back-to-back loan.

  • Q : Current and capital account deficit

     Exhibit 3.3 states that in year 1991, the U.S. had current account deficit and consecutively a capital account deficit. Explain about how this may occur?

  • Q : Factors considering before investing

    Being an investor, what are all factors you would consider before investing within the emerging stock market of developing country?

  • Q : Prepare the journal entry to record the

    On December 31, 20x1, the Kat Co. purchase a group of four assets for a total cost of $1,000,000. An independent appraiser assesses the fair value of each asset asfollows: Asset Fair Value Land $350,000 Building 600,000 Equipment 200,000 Fixtures 150,000 Prepare the journal entry t

  • Q : Special drawing rights Discuss how the

    Discuss how the special drawing rights (SDR) are formed. And also, explain the circumstances due to which SDR was created.

  • Q : Fundamental characteristics of

    State the fundamental characteristics of bureaucracies.

  • Q : Firms attaining the U.S. firms

    Presently, several foreign firms from both the developed and developing countries attained high-tech U.S. firms. What would have motivated these firms in order to attain the U.S. firms?

  • Q : What is Offshore banking center What is

    What is offshore banking center?