Exam 19: Distortionary Taxes and Subsidies

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.

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

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.

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

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.

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.