Consider that you are a government economist asked by a state legislature to apply excise taxes to a variety of goods sold in your state.You know you want to minimize the excess burden of taxation so you apply the Ramsey Rule.This means that you tell the legislature to _____.
A)set the tax rates proportional to the elasticities of demand for each good
B)set the tax rates in inverse proportion to the elasticities of demand for each good
C)set the tax rates proportional to the elasticities of supply for each good
D)set the tax rates in inverse proportion to the elasticities of supply for each good

Question

Quizplus · Accepted Answer

The Ramsey Rule suggests setting tax rates in inverse proportion to the elasticities of demand for each good. This means that goods with a more elastic demand (i.e. where consumers are more sensitive to changes in price) should have lower tax rates, while goods with a less elastic demand (i.e. where consumers are less sensitive to changes in price) should have higher tax rates. By doing this, the goal is to minimize the excess burden of taxation on consumers and avoid distortions in the market.

Consider That You Are a Government Economist Asked by a State