Question

1. True or False explain in detail. Subject: Public Finance

 

(a) The Coase theorem states that, if leisure can not be taxed, efficient taxation requires relatively high taxes on goods that are close substitutes for leisure.

 

(b) If the wage is exogenous, a lump sum tax is equivalent to an equi-proportional tax (i.e., a tax at the same rate) on all commodities except leisure.

 

(c) If the ordinary (uncompensated or Marshallian) demand function for glue is perfectly inelastic, there is no excess burden associated with a tax on the glue.

Answer 1

(a) Given statement is false.

 

Explanation:

The Coase theorem is not on the  basis of if leisure can not be taxed, efficient taxation requires relatively high taxes on goods that are close substitutes for leisure. According to the Coase Theorem, government intervention is  not needed to solve externalities. Bargaining regarding property rights between the parties will internalize the externalities 

 

(b) Given statement is true. 

 

Explanation:

If the wage is exogenous, a lump sum tax is equivalent to an equi-proportional tax (i.e., a tax at the same rate) on all commodities except leisure. Lumpsum tax is fixed annual payments. It does not affect any consumption or aggregate output of the economy.

 

(c) Given statement is true.

 

Explanation:

If the ordinary (uncompensated or marshallian) demand function for glue is perfectly inelastic, there is no excess burden for sellers associated with a tax on glue. But full burden is on consumers. Because even though price increase, demand for good remain unaffected.

(a) Given statement is false.

(b) Given statement is true. 

(c) Given statement is true.