The tax interaction effect is the _________ in excess burden in the labor market stemming from the _______ in real wages caused by a Pigouvian tax.
A) increase; increase
B) reduce; reduction
C) increase; reduction
D) reduction; increase

Question

Quizplus · Accepted Answer

The tax interaction effect refers to the increase in excess burden in the labor market due to the reduction in real wages caused by a Pigouvian tax. This occurs because the tax reduces the overall level of economic activity, leading to lower wages and a higher excess burden.

The Tax Interaction Effect Is the _________ in Excess Burden