The Laffer Curve shows the relationship between Tax-Rates and the Amount of Tax Revenue Collected. Can't a similar principle be used on the price of goods?

To elaborate: The total revenue of a firm will only go up to a certain extent when they increase the price before it starts falling, just like the Laffer curve shows for tax revenue.

I couldn't find much on this on the internet; So wanted to see if there is anything wrong with this assertion.

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    $\begingroup$ That's exactly what the monopoly price is. $\endgroup$
    – Dayne
    Dec 12, 2020 at 12:48

1 Answer 1


Trivially this holds, in many cases, but it is not considered to be Laffer curve or application of the Laffer curve. This is just standard profit/revenue maximization. Let us focus on the revenue part. The total revenue is given by price times quantity $TR=pq$, now quantity will depend on some demand, for example the demand could be $Q = 100 - p$, so the total revenue will in terms of price be:

$$TR=100p -p^2$$

Which in this case will also give you something that looks like Laffer curve, as you can see on the plot from simulation I made in R:

enter image description here

However, note two things:

  1. Demand curves come in various shapes and they critically influence what the shape of total revenue is - consequently the above might not hold for any demand curve you can imagine.
  2. Both this result for revenue and the result that you get zero tax revenue at both $0%$ tax rate and $100\%$ tax rate was known to economists long before Laffer. Laffer curve is called Laffer curve just because Laffer popularized already existing idea and he did so in the realm of taxation. Hence we talk about Laffer curves mostly just when we talk about taxes not other quantities where there will be some 'optimum peak'.
  • $\begingroup$ Ah okay, that makes a lot of sense. Thank you so much for your time, It's much appreciated. $\endgroup$
    – Sahaj
    Dec 12, 2020 at 15:51

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