The market supply of labor is perfectly inelastic.However, the income effect of tax-induced wage changes are believed to be substantial.It then follows that a tax on labor income will:

Question

Quizplus · Accepted Answer

Since the market supply of labor is perfectly inelastic, a tax on labor income would not cause a change in the quantity of labor supplied. However, due to the income effect, workers may reduce their labor effort as their post-tax income decreases. This reduction in labor effort would lead to a decrease in output and economic efficiency, creating excess burden. Additionally, since the tax reduces workers' net wages, they will bear the burden of the tax in the form of a reduction in their post-tax income. Therefore, both (b) and (c) are correct, making option D the best choice.

The Market Supply of Labor Is Perfectly Inelastic