Deck 19: Distortionary Taxes and Subsidies

Question 1

When the leisure demand curve is relatively inelastic,the bulk of the burden of a wage tax falls on workers.

Answer 1

True
Inelastic leisure demand curves translate to inelastic labor supply curves -- and the burden of a tax is always disproportionately born by the side of the market that behaves relatively more inelastically.

Question 2

To identify the burden of a per-unit tax on consumers,we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.

Answer 2

False
The burden of a tax is determined by actual consumer behavior -- which is measured on uncompensated demand curves.

Question 3

A tax on interest income could be efficient even if it leads to a decrease in savings.

Answer 3

True
If consumption now and consumption in the future are perfect complements,savings will decrease when the after-tax interest rate falls -- but there are no substitution effects that give rise to a deadweight loss.

Question 4

The statutory incidence of a tax is the same as the economic incidence of a tax whenever a tax is levied on a side of a market that is perfectly price-inelastic.

Question 5

The larger the wealth effect,the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.

Question 6

Regardless of how price elastic labor demand curves are,employers are unaffected by wage taxes if labor supply is perfectly inelastic.

Question 7

If either the supply or the demand curve in a goods market is very elastic,a per-unit tax will end up not raising very much revenue.

Question 8

Regardless of how price inelastic the supply curve,tax revenue from a per-unit tax rises the more price inelastic the demand curve is.

Question 9

In perfectly competitive markets with identical firms,the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

Question 10

When tastes are quasilinear,the sole reason for the deadweight loss from a per-unit tax is that output falls under the tax.

Question 11

When a per-unit tax is levied on a goods market in which supply is not perfectly inelastic but such a tax nevertheless does not give rise to any deadweight loss,consumers are made no worse off by the imposition of the tax.

Question 12

In perfectly competitive industries with identical firms,consumers always end up paying the entire burden of a per-unit tax on output in the long run.

Question 13

The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.

Question 14

Regardless of whether goods are inferior or normal,the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.

Question 15

The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.

Question 16

A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.

Question 17

The more inelastic the supply curve in a goods market,the smaller will be the deadweight loss from a per-unit tax in that market.

Question 18

Regardless of the size of wealth and substitution effects for workers,the benefit of a wage subsidy will accrue disproportionately to workers if the labor supply curve is relatively more wage-inelastic than the labor demand curve.

Question 19

If supply is perfectly elastic in a consumer goods market,a per unit tax will always be inefficient unless the market demand curve for consumers is perfectly inelastic.

Question 20

The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.

Question 21

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings fall in response to the tax.

Question 22

If demand is linear,tax revenue rises at a constant rate as per unit taxes increase.

Question 23

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed)fall in response to the tax.

Question 24

In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?

Question 25

Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms.In the long run,tax revenue increases as tax rates increase.

Question 26

Under which of the following scenarios does an increase in the wage tax cause a drop in employment but no deadweight loss?
a.
When the wealth effect for workers is larger than the substitution effect.
b.
When the wealth effect for workers is smaller than the substitution effect.
c.
When the wealth effect for workers is equal to the substitution effect.
d.
It is possible under any of these scenarios.
e.
There is no scenario under which this is possible.