Which of the following is true of an excise subsidy?
A)An excise subsidy has both an income and a substitution effect which causes the consumption of the subsidized good to rise.
B)An excise subsidy has a substitution effect since the subsidy artificially lowers the price of the subsidized good causing the consumer to increase consumption of the good,but no income effect.
C)An excise subsidy increases consumption of a good by the same quantity as does a cash transfer but at a lower cost to the government.
D)An excise subsidy has an income effect since the subsidy increases the consumer's income but no substitution effect.

Question

Quizplus · Accepted Answer

An excise subsidy indeed has both an income and a substitution effect. The subsidy effectively lowers the price of the subsidized good, making it more attractive relative to other goods (substitution effect), and it also increases the consumer's purchasing power as if their income has increased because they can now buy more for the same amount of money (income effect). This combination causes the consumption of the subsidized good to rise.

Which of the Following Is True of an Excise Subsidy