a. In each case, shade the area that is the direct burden of
the tax.
b. In each case, shade the area that is the excess burden of
the tax.
c. In which country does the tax cause the greater allocative
inefficiency? Explain.
5. In Canada, capital gains—which occur when assets are sold at
prices greater than their earlier purchase price—are taxed at half
the rates applicable to other income.
a. Who are the likely beneficiaries of this policy?
b. What are the likely effects on the distribution of income
and the allocation of resources?
6. “Taxes on tobacco and alcohol are nearly perfect taxes. They raise
lots of revenue and discourage smoking and drinking.”
a. To what extent are the two effects inconsistent? (Hint:
Think about elasticity.)
b. How is the burden of an excise tax related to the extent to
which it discourages use of the product?
7. Rank the following taxes according to which has the highest
excess burden relative to the direct burden. Start with the highest.
Recall that the direct burden of the tax is equal to the revenue
that the tax raises.
a. An excise tax on one brand of breakfast cereal
b. An excise tax on all breakfast cereals
c. An excise tax on all food
d. An excise tax on everything
8. Classify each of the following government expenditures as either
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