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Social Science6.8) Indicate whether each of the following statements is true, false, oruncertain. Explain why.a.A proportional tax on all commodities including leisure is equivalent to a lump sum tax.b.Efficiency is maximized when all commodities are taxed at the same rate.c.Average cost pricing for a natural monopoly allows the enterprise to break even, but theoutcome is (most likely) inefficient
Expert Answer
To determine whether the statements are true or false.
- The given statement is true. A proportional tax on all commodities (including leisure) is equal to a lump sum tax. Suppose, initially the budget constraint is given as:
PcC + wL = I
Where Pc is the price of consumption good and w is the price of leisure. C and L denotes the quantities of consumption good and labor respectively. Income is denoted by ‘I’. Suppose government imposes a proportional tax on all commodities (including leisure). The new budget constraint is:
(1 – T) PcC + (1 – T) wL = I
PcC + wL = I’
Where I’ equals I/(1 – T) which is less than 1.
So, a proportional tax does not change the relative prices but reduces the income. So, it is like a lump sum tax.
2. This statement is false because efficiency is not maximized when all the commodities are taxed at the same rate. Consider two commodities: milk and alcohol. There is a large proportion of population which purchase milk for their daily needs and there are some alcoholic individuals purchasing alcohol. Both the goods canno...
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