Which of the following is true? Partial equilibrium analysis will:
A) overstate the impact of a tax for both substitutes and complements.
B) understate the impact of a tax for both substitutes and complements.
C) understate the impact of a tax for complements and overstate the impact for substitutes.
D) understate the impact of a tax for substitutes and overstate the impact for complements.

Question

Quizplus · Accepted Answer

Partial equilibrium analysis only looks at the market for a specific good, ignoring the effects on related markets. For complements, an increase in price from a tax would decrease demand for both goods, but partial equilibrium analysis would only look at the decrease in demand for the taxed good and therefore underestimate the impact. For substitutes, an increase in price for one good would increase demand for the other, but again, partial equilibrium analysis only looks at the decrease in demand for the taxed good and thus overestimates the impact. Therefore, option D is the correct answer.

Which of the Following Is True? Partial Equilibrium Analysis Will