Question

1) Carefully explain the distinction between the legal liability for a tax (its statutory incidence) and its economic incidence? If it does not matter which side of a market is taxed on economic incidence grounds, discuss why governments might prefer to attribute liability to one side or the other. (I don't know how to answer the second part of the question)

2) Because monopoly profits are simply an income distributionissue, the conditions for the Fundamental Theorem of WelfareEconomics are satisfied in an economy with some goods provided by monopolies. (is it true or false and why?)

Answer 1

answer 1 )

Tax incidence is an economic term it is a tax burden between buyers and sellers.Tax incidence is related to price elasticity of supply and demand.`When supply is more elastic than demand tax burden falls on buyers,if demand is more elastic than supply ,producers will bear the cost of tax.

Tax incidence depicts the tax obligations which must be covered by every buyers and sellers.

Answer 2)

Welfare economics are satisfied in an economy with some goods provided by monopolies and it holds true.

Before starting the answer : small definition of welfare economics:

Its a branch of Economics which focus on improving human welfare and social condition.It also focuses on optimal allocation of resources.

But some goods which are provided by monopolist also comes under welfare .Like for an example water facility provided in the state by monopolist firm.Under such situation many costs are born by monopolist like setting up of water pipelines managing basic infrastructure so that water can be provided to the state.

some more examples are :

Electric utilities company

Public transportation.

Under such situation consumer surplus is usually lower but welfare of economy is taking place.