Exam 19: Distortionary Taxes and Subsidies

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.

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.

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.

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.

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.

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

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

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.

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

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

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:

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.

Under which of the following scenarios does an increase in the wage tax cause a drop in employment but no deadweight loss?

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.

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

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

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.

Taxes on interest earned from savings are less inefficient

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.

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