Reference no: EM13743033
Consider the case in which 100 adults each own an antique stamp, purchased for $1 each in 1972, and these individuals value the stamp. Each owner values the stamp differently, between $1 and $100 (i.e., one person values his stamp at $1, a second values hers at $2, and so on, with each additional person valuing the stamp by $1 more, until the 100th person values it at $100).
The Museum decides to set up an exhibit on the stamp, offering to buy the stamps for $51 each. This is a one-time offer, and, since there is not an active market in these stamps, owners of the stamps face the choice of selling their stamps to the museum or holding on to the stamps forever. The only catch is that profits made by selling stamps (that is, the difference between sales price and original purchase price) represent taxable capital gains to the seller.
Question:
Assuming that the tax rate (for everyone) on capital gains is 20%, how many people will sell their stamps? What tax revenue will the government receive? What (in numbers) is the deadweight loss associated with this tax, and what (in words) is its source?
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: Consider the case in which 100 adults each own an antique stamp, purchased for $1 each in 1972, and these individuals value the stamp. Each owner values the stamp differently, between $1 and $100
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