If the government wanted to curb consumption of alcohol by taxing alcohol without hurting consumer's welfare it would
A)Raise the tax on alcohol until demand for alcohol became elastic
B)Need to know the substitution effect but not the income effect of a tax hike
C)Need to know the income effect but not the substitution effect of a tax hike
D)Tax until the income effect of the price increase, which would be refunded, is exactly equal to the revenue gained from the tax

Question

Quizplus · Accepted Answer

By taxing until the income effect of the price increase, which can be refunded, is exactly equal to the revenue gained from the tax, the government can avoid hurting consumer welfare. This means that the price increase doesn't significantly affect consumers' purchasing power, and they can still buy the same amount of alcohol as before the tax hike. This approach is an example of a revenue-neutral tax policy.

If the Government Wanted to Curb Consumption of Alcohol by Taxing