Imagine an excise tax and a lump- sum tax which would raise the same revenue from an individual Ms. Arbitrary who has convex preferences. If she was given a choice between the two taxes, then:
A)she would prefer the excise tax.
B)she would be indifferent between the two taxes.
C)we cannot know Ms. Arbitrary's preferences regarding the taxes.
D)she would prefer the lump- sum tax.

Question

Quizplus · Accepted Answer

Given Ms. Arbitrary's convex preferences, she would prefer a lump-sum tax over an excise tax because a lump-sum tax does not distort her consumption choices, allowing her to achieve a higher level of utility for the same amount of tax revenue.

Imagine an Excise Tax and a Lump- Sum Tax Which