Suppose the government levies a tax on all ink pens sold in the country.Assume all goods are normal goods.Which of the following is a spillover income effect of the tax?

Question

Quizplus · Accepted Answer

The spillover income effect of the tax is the change in demand for other goods due to the change in after-tax income. Option A is incorrect because buying fewer pencils would be a substitution effect, not a spillover income effect. Option C is incorrect because the change in the relative prices of pencils and pens would be a substitution effect, not a spillover income effect. Option D is incorrect because if sellers bear the tax, the demand for ink pens would decrease, not increase. Therefore, option B is the correct choice because people may have less after-tax income and choose to buy fewer books as a result. This is a spillover income effect, as it is a change in demand for a different good due to the tax on pens.

Suppose the Government Levies a Tax on All Ink Pens