Question 1

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings fall in response to the tax.

Accepted Answer

When a tax on interest income is imposed,the wealth effect implies less consumption more (i.e.more savings)while the substitution effect implies more consumption now (i.e.less savings).The only way for savings to fall as a result of an increase in the interest rate is for the substitution effect to outweigh the wealth effect -- but the substitution effect then implies the tax is inefficient.

Question 2

If demand is linear,tax revenue rises at a constant rate as per unit taxes increase.

Accepted Answer

Linear demand curves give rise to Laffer curves with an inverse U-shape.

Question 3

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed)fall in response to the tax.

Accepted Answer

When consumption now and in the future are perfect complements,savings increase as a tax on interest income increases -- and the absence of substitution effects implies no deadweight loss.

Question 4

In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?

Accepted Answer

The answer of In most cases,the fact that one of...

Question 5

Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms.In the long run,tax revenue increases as tax rates increase.

Accepted Answer

Consumer spending is always the same if price elasticity is 1,and the long run supply curve is perfectly elastic -- implying taxes will be fully passed onto consumers in the long run.As tax rates rise,consumer prices rise but spending remains constant as consumers purchase less.This implies a smaller share of spending goes to producers and an increasing share is collected as tax revenue.

Question 6

Under which of the following scenarios does an increase in the wage tax cause a drop in employment but no deadweight loss?
a.
When the wealth effect for workers is larger than the substitution effect.
b.
When the wealth effect for workers is smaller than the substitution effect.
c.
When the wealth effect for workers is equal to the substitution effect.
d.
It is possible under any of these scenarios.
e.
There is no scenario under which this is possible.

Accepted Answer

The answer of Under which of the following scenarios does...

Quiz 19: Distortionary Taxes and Subsidies

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings fall in response to the tax.

If demand is linear,tax revenue rises at a constant rate as per unit taxes increase.

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed)fall in response to the tax.

In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?

Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms.In the long run,tax revenue increases as tax rates increase.