Unlike an equivalent-sized cash transfer,an excise subsidy on good X:
A)has an income effect.
B)leaves the consumer better off.
C)has a substitution effect.
D)increases consumption of composite goods.

Question

Quizplus · Accepted Answer

An excise subsidy on good X will lower the price of the good and therefore increase its demand. This will result in a substitution effect as consumers switch from other goods to good X, but it will not necessarily leave the consumer better off since the subsidy is funded by taxes. Additionally, it will not have an income effect like a cash transfer would, and it may or may not increase consumption of composite goods depending on the specific market and consumer preferences.

Unlike an Equivalent-Sized Cash Transfer,an Excise Subsidy on Good X