If an equal-cost lump-sum transfer were substituted for a per unit excise subsidy on good X:
A)the consumption of X under the excise subsidy would be higher and the consumer would be on a higher indifference curve.
B)the consumption of X under the excise subsidy would be higher,but the consumer would be on the same indifference curve.
C)the consumption of X under the lump-sum transfer would be higher and the consumer would be on a higher indifference curve.
D)the consumption of X under the lump-sum transfer could be higher,but the cost of the transfer would be higher.

Question

Quizplus · Accepted Answer

Under a per unit excise subsidy, the consumer would face a lower price for good X and therefore would consume more. However, this subsidy distorts the market and creates deadweight loss. On the other hand, an equal-cost lump-sum transfer does not affect market prices and does not create any deadweight loss. Therefore, if the lump-sum transfer is substituted for the excise subsidy, consumption of good X would be higher and the consumer would be on a higher indifference curve, without any additional cost.

If an Equal-Cost Lump-Sum Transfer Were Substituted for a Per