Question

The United States imposes an excise tax on the sale of domestic airline tickets. Let's assume that in 2013 the total excise tax was \(\$ 6.10\) per airline ticket (consisting of the \(\$ 3.60\) flight segment tax plus the \(\$ 2.50\) September 11 fee). According to data from the Bureau of Transportation Statistics, in 2013, 643 million passengers traveled on domestic airline trips at an average price of \(\$ 380\) per trip. The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of \(\$ 380\) is actual data; the rest is hypothetical. a. What is the government tax revenue in 2013 from the excise tax? b. On January 1, 2014, the total excise tax increased to \(\$ 6.20\) per ticket. What is the quantity of tickets transacted now? What is the average ticket price now? What is the 2014 government tax revenue? c. Does this increase in the excise tax increase or decrease government tax revenue?

Short answer

Answer: To determine if the increase in excise tax increased or decreased the government tax revenue, compare the revenue from 2013 and 2014. If the government tax revenue in 2014 (R) is greater than $3,922,300,000, the revenue increased. If it is less than $3,922,300,000, the revenue decreased. If R is equal to $3,922,300,000, then the revenue remained the same.

Step-by-step solution

Part a: Calculate the government tax revenue in 2013

In 2013, the total excise tax per ticket was $6.10. The total number of passengers who traveled on domestic airline trips was 643 million (643,000,000). To find the government tax revenue in 2013, multiply the number of passengers by the excise tax per ticket: Government tax revenue in 2013 = Number of passengers × Excise tax per ticket Government tax revenue in 2013 = 643,000,000 × 6.10 Government tax revenue in 2013 = $3,922,300,000

Part b: Calculate the quantity of tickets transacted, the average ticket price, and government tax revenue in 2014

In 2014, the total excise tax increased to $6.20 per ticket. To find the quantity of tickets transacted now, we need to first calculate the change in tax per ticket, and then use that to estimate the new average ticket price. Using the new average ticket price, we can determine the approximate number of tickets transacted by referring to the supply and demand schedules (which are not provided here but should be available in accompanying course material). Change in tax per ticket = New excise tax - Old excise tax Change in tax per ticket = 6.20 - 6.10 Change in tax per ticket = $0.10 To estimate the new average ticket price, add the change in tax per ticket to the 2013 average ticket price: New average ticket price = Old average ticket price + Change in tax per ticket New average ticket price = 380 + 0.10 New average ticket price = $380.10 Based on this new average ticket price, determine the quantity of tickets transacted in 2014 from the supply and demand schedules. Let's call this quantity Q. To find the government tax revenue in 2014, multiply the number of tickets transacted (Q) by the new excise tax per ticket: Government tax revenue in 2014 = Q × 6.20 Let's call this revenue R.

Part c: Determine if the increase in excise tax increased or decreased government tax revenue

To see if the increase in excise tax led to an increase or decrease in government tax revenue, compare the revenue from 2013 and 2014 (R and $3,922,300,000): If R > $3,922,300,000, then government tax revenue increased. If R < $3,922,300,000, then government tax revenue decreased. If R = $3,922,300,000, then government tax revenue remained the same. Based on this comparison, the increase in excise tax either increased or decreased the government tax revenue.

Key concepts

Government Revenue

Understanding how an excise tax affects government revenue requires a simple but crucial calculation. An excise tax is a fixed charge levied on a specific good or service, and it directly impacts the revenue collected by the government. In practice, the total government revenue from an excise tax equals the number of units sold multiplied by the tax amount per unit.
In the context of the airline industry, consider the example from 2013 where the total excise tax per airline ticket was \\(6.10\. With 643 million travelers, the revenue calculation becomes: \( \text{Government Revenue} = 643,000,000 \times 6.10 \). This resulted in earnings of \\)3,922,300,000\.

• When the excise tax increased, the potential revenue also changed based on the number of tickets sold after the tax increase.
• It's important to monitor both the quantity of sales and the tax rate, as they are key factors in revenue estimation.
• Comparing revenues from different years helps determine the tax's impact.

Adjustments in excise taxes can lead to corresponding changes in government revenue, emphasizing the balance between tax rates and sales volumes.

Demand and Supply

To understand the effect of an excise tax on demand and supply, one must first grasp the fundamental laws of these economic concepts. The demand schedule shows how much of a product consumers are willing to buy at different prices, while the supply schedule reflects how much sellers are willing to offer.
In the airline sector case, when the excise tax was increased in 2014, affecting ticket prices, it influenced both demand and supply.

• As prices rise due to higher taxes, demand typically decreases, meaning fewer people are willing or able to purchase tickets at the new price.
• Conversely, supply might increase because airlines could raise prices to maintain profit margins, reducing the impact on their bottom line.

This dynamic between demand and supply is crucial, as it showcases real-world impacts of fiscal policies. Economic equilibrium—where supply meets demand—is disrupted by such interventions, potentially leading to decreased transaction volumes and altered market pricing.

Airline Industry

The airline industry is a prime example of how government policies and taxes affect economic sectors. Airlines operate in a highly competitive market where pricing strategies are crucial for both cost management and customer attraction.
When additional taxes like the excise tax are imposed, airlines must decide how to incorporate these costs. Often they adjust ticket prices, impacting consumer behavior.

• Increased ticket prices due to taxes may deter some travelers, particularly those sensitive to price changes, reducing overall travel demand.
• Airlines might seek efficiency improvements or operational adjustments to mitigate tax impacts.

The broader industry ramifications can include shifts in consumer choice, where competitors might offer different pricing models. Additionally, these tax changes can indirectly affect jobs, investments, and profitability within the airline industry. By understanding these effects, stakeholders can make informed decisions regarding operations and strategic development.