TAXATION AND EFFICIENCY'

• What are Lump-sum Taxes

  A fixed sum paid by the taxpayer that is independent of their economic decisions
• True/False : Lump sum taxes lead to both income and substitution effect

  False
• What are price-distorting taxes?

  Taxes that make the prices received by sellers different from the prices paid by the buyers
• True/False: Price distorting taxes lead to both income and substitution effect

  True
• What is excess burden?

  The loss in welfare from a tax above and beyond what is collected from tax revenue
• What are two other words for excess burden?

  Welfare costs or Deadweight Loss
• What is Equivalent Variation?

  The vertical distance between the original and parallel shifted budget constraint
• What tells us how much income the customer is willing to lose to keep the prices the same(avoid the tax)?

  Equivalent Variation
• What is a formula for Excess Burden?

  Equivalent Variation - Tax Revenue
• Do income taxes entail excess burden? Y/N

  Yes
• Does the consumer's purchasing power increase or decrease with a decrease in price (income effect)?

  Increase
• What effect makes consumers substitute away from more expensive to less expensive goods?

  Compensated Effect
• What is the formula for uncompensated effects?

  Substitution effect + Income Effect
• What do uncompensated effects tell us?

  Total impact of a price change
• True/False: This is the formula used when supply is perfectly elastic "$(1/2)*$$E_d*$$P*$$Q*$$t^2$"


  True
• True/False: This is the formula when supply is not perfectly elastic " $\frac{1}{2}*$$(\frac{E_s*E_d}{E_s+E_d})*$$P*$$Q*$$T^2$"


  True
• Is the excess burden higher/lower for goods whose demand is more elastic

  Higher
• Is the Excess burden larger /smaller for goods that make up more of the consumer's expenditure?

  larger
• What is the theory of second best?

  In the event of pre-existing distortions, policies that would on their own cause inefficiency can actually increase efficiency
• True/False: A subsidy cannot result in Excess Burden

  False
• Does an additional hour of labour supplied increase/reduce utility

  Reduce
• What is the elasticity of reported taxable income?

  The % change in taxable income when a person's net if marginal tax rate increases by 1%