If the supply of capital is perfectly elastic,a tax on capital income results in

Question

Quizplus · Accepted Answer

When the supply of capital is perfectly elastic, a tax on capital income leads to an increase in the cost of borrowing for firms, leading them to reduce their borrowing or invest less, which results in a deadweight loss. Since the supply of capital is perfectly elastic, lenders can easily shift the tax burden to the borrower (firm), which means that borrowers (firms) pay all of the tax. Therefore, option B is the correct answer.

If the Supply of Capital Is Perfectly Elastic,a Tax on Capital