Question

• The following are expected impacts coming from a per unit Sales Tax (t) on a particular good x, EXCEPT:

	Increases the price paid by consumers after the tax is imposed.
	Reduces the price collected by producers after the tax is imposed.
	The Tax Incidence on Consumers is Always higher than the Tax Incidence on Producers.
	It creates a Deadweight Loss.

• The following are expected effects coming from a Subsidy imposed on a particular good x, EXCEPT: NOTE: Assume all consumers are eligible for the subsidy.

	The price the consumer pays after the subsidy will be lower.
	The price the producer collects after the subsidy will be higher.
	It will not create any kind of inefficiency.
	More production will be generated.

• Based on the analysis presented in the lecture for Week 5, the following are considerations regarding the Optimal Tax per unit (t), from the perspective of the Policy makers, EXCEPT:

	Any tax (t) creates a DWL
	A higher tax per unit will create a higher DWL.
	Any tax is optimal, since only affect consumers, and consumers will not be able to avoid the tax.
	A higher tax per unit will not necessarily create more revenue (Laffer Curve)

Answer 1

1. Whether the relative money burden (incidence) of a tax is on producers or buyers depends upon the elasticity of demand and supply. If the demand is elastic, less burden will be imposed on the buyers and more burden is shared by the producers. On the other if the demand is inelastic more burden is shared by the buyers and less burden is shared by the producers. Thus it is not necessary that the incidence of tax is always higher on the consumers.

Answer: The Tax incidence on consumers is always higher than the tax incidence on producers.

2. Subsidy creates inefficiency. The cost of the government is always greater than the increased benefit to the consumers and producers.

Answer; It will not create any kind of inefficiency.

3. A tax is optimal when it satisfies equity and efficiency.

Answer: Any tax is optimal, since only affect consumers and consumers will not be able to avoid the tax.