Deck 19: Distortionary Taxes and Subsidies

Question 1

When the leisure demand curve is relatively inelastic, the bulk of the burden of a wage tax falls on workers.

Answer 1

True

Question 2

Regardless of whether goods are inferior or normal, the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.

Answer 2

False

Question 3

If either the supply or the demand curve in a goods market is very elastic, a per-unit tax will end up not raising very much revenue.

Answer 3

False

Question 4

The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.

Question 5

In perfectly competitive industries with identical firms, consumers always end up paying the entire burden of a per-unit tax on output in the long run.

Question 6

The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.

Question 7

The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.

Question 8

To identify the burden of a per-unit tax on consumers, we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.

Question 9

When a per-unit tax is levied on a goods market in which supply is not perfectly inelastic but such a tax nevertheless does not give rise to any deadweight loss, consumers are made no worse off by the imposition of the tax.

Question 10

The larger the wealth effect, the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.

Question 11

If supply is perfectly elastic in a consumer goods market, a per unit tax will always be inefficient unless the market demand curve for consumers is perfectly inelastic.

Question 12

The statutory incidence of a tax is the same as the economic incidence of a tax whenever a tax is levied on a side of a market that is perfectly price-inelastic.

Question 13

Regardless of the size of wealth and substitution effects for workers, the benefit of a wage subsidy will accrue disproportionately to workers if the labor supply curve is relatively more wage-inelastic than the labor demand curve.

Question 14

Regardless of how price inelastic the supply curve, tax revenue from a per-unit tax rises the more price inelastic the demand curve is.

Question 15

Regardless of how price elastic labor demand curves are, employers are unaffected by wage taxes if labor supply is perfectly inelastic.

Question 16

A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.

Question 17

When tastes are quasilinear, the sole reason for the deadweight loss from a per-unit tax is that output falls under the tax.

Question 18

In perfectly competitive markets with identical firms, the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

Question 19

The more inelastic the supply curve in a goods market, the smaller will be the deadweight loss from a per-unit tax in that market.

Question 20

A tax on interest income could be efficient even if it leads to a decrease in savings.

Question 21

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?

Question 22

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.

Question 23

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.

Question 24

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.

Question 25

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

Question 26

It is usually more efficient to tax a large base at a low rate than to tax a small base at a high rate.

Question 27

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.

Question 28

As demand and supply become more elastic, taxes reduce market output more and raise less tax revenue.

Question 29

Assuming upward sloping labor supply, wage subsidies are definitely more inefficient

A)the more elastic labor demand is.
B)the more elastic labor supply is.
C)the more substitutable consumption and leisure are.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)All of the above
H)None of the above

Question 30

Which of the following is definitely true for a per-unit tax in the goods market where neither demand nor supply is perfectly inelastic:

A)The more price inelastic demand is, the lower deadweight loss will be.
B)The more price inelastic supply is, the higher deadweight loss will be.
C)A demand become more price inelastic, the after tax price for consumers rises.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)All of the above
H)None of the above

Question 31

Which of the following is true about an increase of a per-unit tax in a goods market where the good is quasilinear assuming neither supply nor demand is perfectly inelastic:

A)The more price elastic either demand or supply, the lower will be tax revenue.
B)The more price elastic either demand or supply, the greater will be deadweight loss.
C)The higher the tax rate, the greater the fraction of deadweight loss over revenue.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)All of the above
H)None of the above

Question 32

Taxes on interest earned from savings are less inefficient

A)the less savings behavior responds to increases in the tax rate.
B)the more savings behavior responds to increases in the interest rate.
C)the less willing individuals are to substitute consumption today for consumption in the future.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)None of the above
H)All of the above