Lecture 5.5 Commodity taxation

Question 1

What is the rationale for subsidizing goods like childcare?

Answer 1

Goods like childcare are complements to working, as they help individuals participate in the labor market. Subsidizing such goods counteracts the negative work incentives caused by income taxes

Question 2

What is the Ramsey Rule in the context of commodity taxation?

Answer 2

The Ramsey Rule suggests that goods with elastic demand should face lower taxes to minimize distortions. However, this rule applies primarily when commodity taxes are considered in isolation, not in well-developed tax systems that include income taxes

Question 3

What is corrective taxation and when is it justified?

Answer 3

Corrective taxation is used to correct for externalities or internalities, such as harmful consumption. Taxes are justified when the harm is not taken into account by individuals, either due to externalities or personal decision-making failures like myopia or lack of self-control

Question 4

What are sin taxes, and why might they be imposed?

Answer 4

Sin taxes are taxes on harmful goods like cigarettes, alcohol, or unhealthy food. They are a form of paternalism aimed at correcting individual decision-making failures, such as self-control problems, to improve welfare by helping individuals achieve their long-term goals.