Exam 11: Taxation, Prices, Efficiency, and the Distribution of Income 

Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services.This implies that the:

The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.

The current price of compact discs, which are traded in perfectly competitive markets, is $10.A $1 per unit tax is levied on the discs.Annual record sales decline from five million to four million as a result of the tax.Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:

If a per unit tax is imposed but the quantity supplied and demanded does not change, then:

A lump-sum tax:

A tax on land results in an income effect on landlords but no substitution effect.It then follows that the excess burden of a tax on land will be zero.

The market supply of labor is perfectly inelastic.However, the income effect of tax-induced wage changes are believed to be substantial.It then follows that a tax on labor income will:

If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.

Which of the following is true about a lump-sum tax?

Lump-sum taxes can vary in amount based on income level.

An income tax is an example of a price-distorting tax.

The supply of new cars is perfectly elastic.A $400 per car tax is levied on buyers.As a result of the tax, the

If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings?

A 10 percent tax is levied on the sale of soft drinks.This tax is collected from the sellers of the drinks.A critic of the tax argues that the sellers will shift the entire tax to the buyers and therefore be no worse off.Evaluate this argument by showing the market conditions that would have to prevail for the prediction to be correct.Indicate under what circumstances the tax will be shared by the buyers and the sellers of soft drinks.

Currently, a 10 cent per gallon tax is levied on gasoline consumption.The tax is increased to 20 cents per gallon.The excess burden of the tax will:

A consumer currently pays $500 a year in retail sales taxes.She would be better off if she paid the same amount annually as a lump-sum tax.

A lump-sum tax only results in income effects.

A lump-sum tax results in both income and substitution effects.

Assuming that the income effects are negligible and that beer is sold in a competitive market, a tax of 10 cents per can of beer that causes a decline in sales of 10,000 cans per month will result in an excess burden of $1,000 per month.

If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con?sumers than would be the case if the same good were produced by a competitive industry.