Suppose the Zambian legislature passes a law requiring that 1 billion Kwacha a year be raised via two new taxes, one on good X and another on good Y, but leaves the choice up to the Finance Minister on what rates to choose for tx and ty. Suppose that these goods are produced by competitive industries at constant marginal cost and suppose the demand and supply curves are for each kind of good are known, and the goods are neither complements nor substitutes. (a) How should the governor choose the various tax rates to minimize the total excess burden raised by the new taxes? (b) Finally, suppose that demand for good X is less elastic than demand for good Y. Does that mean the tax rate on X will be higher or lower? (c) If the reason X demand is less elastic is that richer people consume more X and they can afford the extra taxes, does this undermine or enhance the case for the tax scheme you proposed?

Suppose the Zambian legislature passes a law requiring that 1 billion Kwacha a year be raised via two new taxes, one on good X and another on good Y, but leaves the choice up to the Finance Minister on what rates to choose for tx and ty. Suppose that these goods are produced by competitive industries at constant marginal cost and suppose the demand and supply curves are for each kind of good are known, and the goods are neither complements nor substitutes. (a) How should the governor choose the various tax rates to minimize the total excess burden raised by the new taxes? (b) Finally, suppose that demand for good X is less elastic than demand for good Y. Does that mean the tax rate on X will be higher or lower? (c) If the reason X demand is less elastic is that richer people consume more X and they can afford the extra taxes, does this undermine or enhance the case for the tax scheme you proposed?

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter5: Difficult Cases For The Market And The Role Of Government

Section: Chapter Questions

Problem 10CQ

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