In a hypothetial society, the government has decided to right the historic wrongs done to vertically challenged (ie short) people. Part of the program involves subsidizing the purchase of stilts by short people. Specifically, each pair of stilts purchased by a short person recieves a subsidy of S percent. To finance this subsidy, each pair of stilts purchased by someone who is tall is taxed at a rate of T percent.
i) the relevant supply curve are perfectly horizontal so that the price to short people falls by exactly S percent and the price to tall people rises by exactly T percent;
ii) there are no other taxes, subsidies, or market imperfections in the economy; and
iii) the economy's only inputs, capital and labor, are each in fixed supply.
After the subsidies and taxes are imposed,
a. Is the allocation of resources on the production possibilities curve?
b. Is the allocation on the contract curve?
c. Is the allocation of resources Pareto efficient?
a: Yes. it is on the production possiblities curve. Note that the supply side didn't change. ...
Help is given with production possiblities curves.