The following was heard on a primetime news cast. "The government has just increased the sales tax. This is unfair to consumers, particularly the poor, because budgets are already stretched far enough. It would have been much more fair for the government to have levied an excise tax on firms as a way of making big business give back to the community." Explain why the person's argument is more than likely incorrect. Be sure to discuss whether the person has over or understated the effect of the tax on consumers and producers.
What will be an ideal response?
The person's reasoning is incorrect because they are confusing the legal and economic incidence of the tax. An excise tax no more hurts the producer than does the sales tax. At the same time, the excise tax no more helps the consumer than does the sales tax. The person has overstated the effect of the sales tax on consumers and understated the effect on producers. At the same time, the person has overstated the effect of the excise tax on producers and understated the effect of the excise tax on consumers.
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A) adverse selection. B) negative selection. C) moral hazard. D) lemon hazard.
To avoid subsidies, the government should cap the price for natural monopolies at their:
A. marginal cost. B. fixed cost. C. average total cost. D. average variable cost.
If the government imposes a price ceiling below the market equilibrium price, which of the following will result?
A. There will be a surplus of the good. B. The quantity demanded will exceed the quantity supplied. C. The quantity supplied will exceed the quantity demanded. D. The demand curve will shift to the left.
The purpose of the ceteris paribus assumption used in economic analysis is to:
A. Avoid making normative statements B. Distinguish macroeconomics from microeconomics C. Make sure that all relevant factors are considered D. Focus on the effect of a single factor on a certain variable