prob_set_03

prob_set_03 - University of California, Davis Department of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
University of California, Davis Department of Economics ECONOMICS 131 Spring 2008 L. Jay Helms Problem Set #3: Taxation and Efficiency 1. Excess Burden of a Tax on an Inelastically Demanded Good Suppose that the marginal cost of producing light bulbs is constant at $1.00 per bulb. People often think of taxes as having higher excess burdens when they are levied on commodities for which the elasticity of market demand is greater. However, this is an imprecise statement of the situation. a. Suppose the market (or “ordinary,” or “Marshallian,” or “fixed-income,” or “uncompensated”) demand curve for light bulbs is vertical. Use indifference curve analysis (not demand curves) to show that the unit tax levied on buyers of bulbs can nonetheless produce an excess burden. b. Now explain verbally how a “tax wedge” can generate an excess burden despite the fact that the tax leaves the quantity demanded of the taxed good unchanged. 2.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

prob_set_03 - University of California, Davis Department of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online