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A-Level Economics · Laffer curve diagram question

Why MUST a revenue-maximising tax rate exist somewhere between the two ends?

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The diagram

The answer

Revenue is zero at 0% AND at 100%, but positive in between — connect the dots and there has to be a maximum somewhere. Two zeros at the ends, positive revenue in between: the curve has to rise and then fall, so it has to peak. Start from the endpoints: zero at 0%, zero at 100%. In between the government clearly collects something. Connect those dots and the curve must rise and then come back down — so there must be a maximum somewhere: the revenue-maximising rate. Note what the diagram does NOT tell you: where t* actually is. That is the honest limit of the model.

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This is one of 5 questions on the laffer curve diagram — every corner lettered, every wrong answer diagnosed.

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