4. Other things being equal, a lump sum tax is at least as good for a...

4. Other things being equal, a lump sum tax is at least as good for a consumer as a quantity tax that collects the same revenue from him.

TRUE or FALSE (Explain)

Solutions

Expert Solution

True.

When a lump-sum tax is levied on the consumers, their budget line shifts leftwards, depicting a fall in total income by the amount of the tax T i.e. it has an income-effect.

However, when a quantity tax "t" is levied per unit of the commodity sold, it is comparable to a price change. This is because one commodity becomes more expensive (on which the tax is levied) as compared to the other commodities. As a result, the consumers react more to a per-unit tax than the lump-sum tax.

The lump-sum tax is thus considered to be more efficient because deadweight loss arises when consumers substitute their consumption away from a particular good (there is no substitution effect with lump-sum tax).

Ans. (TRUE)

Rahul Sunny answered 1 year ago

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