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Explain why lump-sum taxes will not cause any losses in efficiency. Are lump-sum taxes feasible? Lump-sum taxes do not result in substitution effects, but they do affect prices. Is this a contradiction?

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Lump-sum taxes are clarified in this solution.

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Explain why lump-sum taxes will not cause any losses in efficiency.

A lump-sum tax is defined by the condition that no change in behavior can affect the level of the tax. Lump-sum tax does not prevent prices from being equal to the marginal cost and social benefit of good and services. Such a tax transfers resources from private ...

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Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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