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 would be refunded, is exactly equal to the revenue gained from the tax, consumers' purchasing power remains the same and their welfare is not affected. This requires knowledge of both the substitution and income effects of the tax hike.

If the Government Wanted to Curb Consumption of Alcohol by Taxing