Chapter_15_v2 - Part 4 A Framework for Tax Analysis Chapter...

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Part 4 – A Framework for Tax Analysis Chapter 15 – Taxation and Efficiency 1. a. The supply of land is fixed, or perfectly inelastic, so there is no excess burden because the lower price that sellers receive does not cause quantity supplied to fall. b. The use of cell phones is probably fairly price-elastic, which implies that the excess burden could be large. c. It is possible that companies could identify themselves as high-tech in order to receive the subsidy. Thus, the supply is quite elastic, and there will be substantial excess burden. d. Consumers and sellers will likely agree to avoid cups and glasses in order to avoid the tax. A tax that is easily avoided does not have much of an impact, except to create some inconvenience, and does not raise revenue. e. Card companies can easily increase or decrease the number of cards in a pack, avoiding the tax and reducing the excess burden. f. There are many good substitutes for blueberries. Therefore, their demand is quite elastic, and a tax on them will have a substantial excess burden, relative to the size of revenues collected. 2. Prior to the tax, you and your neighbor are both made better off by the trade. After the introduction of the tax, the work does not get done even though you would be willing to accept the wage that your neighbor is willing to pay. This loss of a potentially beneficial trade that is not compensated by an increase in tax revenue (in fact, no tax is collected) is exactly the idea of excess burden. 3. Equation 15.3 relates excess burden to elasticity, price, quantity, and the tax rate. Replacing a general sales tax with a tax on a few products would require a higher tax rate, which increases excess burden, other things equal. The equation indicates that it is better to tax many commodities at a lower rate than to tax a few commodities at a higher rate so the change in the tax structure for Michigan would decrease efficiency. 4.
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Chapter_15_v2 - Part 4 A Framework for Tax Analysis Chapter...

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