Chapter 7B Taxation and Resource Allocation

Question 1

Excise Tax

Answer 1

Per unit tax; Destroys allocation efficiency unless perfectly inelastic

Question 2

Tax Wedge

Answer 2

Pc = Ps + t

Question 3

Result of Taxes to consumers/suppliers/quantity

Answer 3

Consumers pay more
Suppliers receive less
quantity on the market is less to a level below the level that would satisfy allocation efficiency

Question 4

Tax Incidence, how is it determined

Answer 4

who pays the tax. Determined by the relative price elasticities of demand and supply
More elastic, pay less tax
Less elastic, pay more tax

Question 5

Perfectly Inelastic Demand

Answer 5

consumers bear the entire burden of the tax

No change in quantity so allocation efficiency is still achieved

Question 6

Perfectly Inelastic Supply

Answer 6

sellers bear the entire burden of the tax

allocation efficiency is still achieved

Question 7

Perfectly Elastic Demand

Answer 7

Suppliers bear entire burden of tax

Question 8

Perfectly Elastic Supply

Answer 8

Consumers bear entire burden of tax

Question 9

Three kinds of taxes and what they are

Answer 9

Progressive: Proportion of income paid in taxes rises as income rises (harder on the wealthy)
Proportional (flat tax): proportion of income paid in taxes stays the same as income rises (in the middle for wealthy and poor)
Regressive: Proportion of income paid in taxes falls as income rises (harder on the poor)