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Figure 3.12 The Effect of a Larger Tax on Boston Movie Tickets
After an increase in the tax on movie tickets in Boston from t1 to t2, the tax wedge between the price consumers pay and the price movie theaters receive increases, while the quantity of movie tickets at the equilibrium (Q3) decreases. The tax revenue is now B + D + G. Area E, a part of the government’s tax revenues under the lower tax, is a part of the deadweight loss, C + E + F + H. Since the incremental DWL is C + E + H and the revenue gain is only B + GE, the incremental revenue created by the second larger tax is more inefficient than that of the first smaller tax.