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ECONOMICS-2015: Daily Answer Writing Challenge – 8

ECONOMICS-2015: Daily Answer Writing Challenge – 8


  1. What do you understand by shifting of a tax? How does a monopolist succeed in shifting the burden of a tax under increasing marginal cost? (2014 – 10 marks)
  2.  Should the government impose a unit tax or an ad valorem tax if the objective is that they should both impose the same burden at the initial price before the imposition of the tax, given a certain yield of tax is to be obtained? Demonstrate your answer with a diagram. (2013 – 25 marks)
  3. What is rent seeking? Consider a proposal by a government to levy a proportional tax on income so as to subsidize the consumption of a good. The proportional tax at a rate t reduces the wage received to w(l – t) which with a standard upward sloping supply of labour curve will reduce the hours of labour worked from say L2 to Ll. The net income of the person falls and tax revenue will be twLl. This is transferred as a subsidy which reduces the price of the subsidized good from P to P — S and increases the quantity demanded from Q1 to Q2. What is the valuation of the subsidy by the recipient? Is it equal to the value of taxes paid to finance the subsidy? If the tax payer decides to devote resources to rent seeking to forestall the policy to subsidize the good and the subsidy recipient is also willing to devote resources to encourage the adoption of the policy, who will have the advantage in the rent seeking context? (2013 – 25 marks)