Question 1

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

Accepted Answer

When the leisure demand is relatively inelastic, workers are less likely to reduce their leisure time and instead bear the burden of the wage tax in the form of lower take-home pay. This is because the employers are unlikely to reduce wages due to the difficulty of finding replacement workers, making it challenging for workers to shift the burden of the tax to their employers.

Question 2

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.

Accepted Answer

False

Question 3

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.

Accepted Answer

A per-unit tax can still raise significant revenue even if one of the curves is very elastic, as long as the quantity sold remains substantial. Elasticity affects the distribution of tax burden, not necessarily the total revenue.

Question 4

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.

Accepted Answer

The consumer-side deadweight loss also arises from the fact that the tax increases the price paid by consumers, reducing their consumer surplus, and distorting their purchasing decisions leading to an inefficient allocation of resources.

Question 5

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.

Accepted Answer

In a perfectly competitive industry, firms have no market power to pass on the tax burden to consumers in the form of higher prices. Instead, they will lower their production and supply, causing the market price to increase until the consumers bear the full burden of the tax. This occurs in the long run after all firms have adjusted to the tax.

Question 6

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

Accepted Answer

Price elasticity measures the responsiveness of quantity demanded or supplied to changes in price. If a market is more price-inelastic, it means that the quantity demanded or supplied does not change much in response to changes in price. Therefore, when a per-unit subsidy is introduced, the price will decrease and the quantity demanded or supplied will increase. The economic benefit of the subsidy will be greater for the side of the market that is less responsive to price changes, since they will be able to capture more of the subsidy benefit through higher prices and profits. On the other hand, the side of the market that is more price-sensitive will receive less of the benefit, since they will only be willing to buy or sell at the lower, subsidized price.

Question 7

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

Accepted Answer

When the supply curve is more elastic than the demand curve, producers can more easily shift the burden of the tax onto consumers by decreasing the quantity supplied and increasing the price. Consumers, on the other hand, will be less willing to purchase the product at the higher price, leading to a greater decline in quantity demanded. This results in a greater burden of the tax falling on the consumers.

Question 8

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.

Accepted Answer

The burden of a per-unit tax on consumers can be identified using the demand curve, which reflects the marginal willingness to pay, regardless of whether the underlying good is quasilinear or not. The concept of quasilinearity is not a prerequisite for analyzing tax incidence using demand and supply curves.

Question 9

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.

Accepted Answer

A per-unit tax, even without deadweight loss, typically increases the price consumers pay and/or decreases the price producers receive, making consumers worse off through higher prices or reduced availability of the good.

Question 10

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.

Accepted Answer

The wealth effect refers to the increase in spending that occurs when individuals feel wealthier due to an increase in the value of their assets, such as stocks or real estate. If the wealth effect is large, it means that people are more likely to continue spending even if their wages are taxed. This reduces the likelihood of a Laffer curve that has a downward sloping portion, as there will still be a significant amount of revenue generated even with higher tax rates.

Question 11

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.

Accepted Answer

A per unit tax in a market with perfectly elastic supply does not necessarily lead to inefficiency unless the demand is perfectly inelastic. Efficiency loss (deadweight loss) occurs when the tax distorts the quantity traded away from the equilibrium. In a perfectly elastic supply, the supply curve is horizontal, indicating suppliers are willing to supply any quantity at a specific price. If demand is not perfectly inelastic (vertical), a per unit tax can still cause a deadweight loss by reducing the quantity demanded, as consumers respond to the effective price increase caused by the tax.

Question 12

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.

Accepted Answer

When a tax is levied on a side of a market that is perfectly price-inelastic, the suppliers or consumers cannot adjust their behavior in response to the tax, and therefore, the entire burden of the tax falls on that side of the market. In this case, the statutory incidence of the tax (i.e., who is legally responsible for paying the tax) and the economic incidence of the tax (i.e., who actually bears the burden of the tax) are the same. Thus, the statement in the question is true.

Question 13

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.

Accepted Answer

If the labor supply curve is relatively more wage-inelastic than the labor demand curve, workers will not be able to easily substitute away from the labor market and will therefore benefit more from a wage subsidy. This means that even if the size of wealth and substitution effects for workers is not very significant, the wage subsidy will still have a greater impact on workers than on employers.

Question 14

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

Accepted Answer

This statement is true. When the demand for a good is price inelastic, it means that consumers are not very responsive to changes in price, and as a result, they will continue to purchase the good even if its price increases due to the tax. This means that the tax will not significantly decrease the quantity demanded of the good, and therefore, the tax revenue from a per-unit tax will increase as the demand curve becomes more price inelastic.

Question 15

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

Accepted Answer

Wage taxes generally shift the labor demand curve downward, resulting in a lower equilibrium wage and a lower quantity of labor. However, if labor supply is perfectly inelastic, the quantity of labor supplied remains the same regardless of the wage rate. In this case, employers are able to fully pass on the cost of wage taxes to their workers in the form of lower wages without experiencing a decrease in the quantity of labor demanded. Therefore, regardless of how price elastic labor demand curves are, employers are unaffected by wage taxes if labor supply is perfectly inelastic.

Question 16

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

Accepted Answer

The answer of A wage tax in a labor market...

Question 17

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

Accepted Answer

In quasilinear preferences, the consumer assigns a fixed dollar amount to non-quantifiable features of the good, allowing them to increase their consumption of the good when the price decreases. As a result, the consumer surplus decreases linearly with quantity and is independent of price. Thus, the only reason for the deadweight loss from a per-unit tax is reduced output due to higher prices, as quasilinear tastes eliminate any substitution effect.

Question 18

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.

Accepted Answer

When a tax is imposed on a perfectly competitive market with identical firms, the price of the product increases, which reduces the quantity demanded by consumers. As a result, the market demand becomes less elastic, and producers are not able to shift the entire burden of the tax onto consumers. Therefore, both producers and consumers share the burden of the tax in the short run.

Question 19

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.

Accepted Answer

If the supply curve is inelastic, it means that producers are less responsive to changes in price, so they will bear more of the tax burden and pass on less of it to consumers through price increases. This results in a smaller deadweight loss because there is less distortion in the market caused by the tax. In contrast, if the supply curve is very elastic, producers are more responsive to changes in price, so they will pass on more of the tax to consumers through price increases. This results in a larger deadweight loss because there is more distortion in the market caused by the tax.

Question 20

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

Accepted Answer

Even if a tax on interest income leads to a decrease in savings, it could still be efficient if it generates enough revenue to fund important government programs or if it helps to redistribute wealth and promote economic equality. The efficiency of a tax depends on a variety of factors beyond just its effect on savings behavior.

Quiz 19: Distortionary Taxes and Subsidies