Suppose the government is considering levying one of two taxes. The first tax is a lump...

Suppose the government is considering levying one of two taxes. The first tax is a lump sum tax which

raises $200 from Terry, who has the usual-shaped preferences. The second tax is an excise tax on the

consumption of internet services which also raises $200 from Terry. Which of the following statements is/are

correct?

Select one:

a. Terry would be better off under the excise tax than under the lump sum tax

b. Under the excise tax, the change in Terry's consumption of internet services will be comprised
of an income effect only, while that under the lump sum tax will include an additional substitution effect

c. Terry would be better off under the lump sum tax than under the excise tax

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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