The effect of substituting an equal-cost lump-sum grant for an excise subsidy is to:
A)increase the consumption of the subsidized good and increase the consumption of other goods.
B)decrease the consumption of the subsidized good and increase the consumption of other goods.
C)decrease the consumption of the subsidized good and decrease the consumption of other goods.
D)increase the consumption of the subsidized good and decrease the consumption of other goods.

Question

Quizplus · Accepted Answer

Substituting an equal-cost lump-sum grant for an excise subsidy decreases the consumption of the subsidized good because the direct financial incentive to purchase that good is removed. It increases the consumption of other goods because consumers now have more general purchasing power that they can allocate according to their preferences.

The Effect of Substituting an Equal-Cost Lump-Sum Grant for an Excise