Chapter 1 - Introduction

1.
Please make your own judgments based on such information.
a. McCains statement is consistent with an organic conception of
government. .
b. Locke makes a clear statement of the mechanistic view of the state in which
individual liberty is of paramount importance.
c. Chavezs statement is consistent with an organic view of government. The
individual has significance only as part of society as a whole.
2.

Libertarians believe in a very limited government and are skeptical about the
ability of government to improve social welfare. Social democrats believe
that substantial government intervention is required for the good of
individuals. Please make your own judgments based on such information.

3.
The mechanistic view of government says that the government is a
contrivance created by individuals to better achieve their individual goals. In
contrast, social democrats might argue that people are too short sighted to
know what is good for them, so that government-provided inducements are
appropriate. Please make your own judgments based on such information.
4.
a. If the size of government is measured by direct expenditures, the mandate
does not directly increase it. Costs of compliance, however, may be high
and would appear as an increase in a regulatory budget.
b. This ban would not increase government expenditures, but the high costs of
compliance would increase the regulatory budget.
c. Its hard to say whether this represents an increase or decrease in the size
of government. One possibility is that GDP stayed the same, and
government purchases of goods and services fell. Another is that
government purchases of goods and services grew, but at a slower rate
than the GDP. One must also consider coincident federal credit and
regulatory activities and state and local budgets.The federal budget
would decrease if grants-in-aid were reduced. However, if state and
local governments offset this by increasing taxes, the size of the
government sector as a whole would not go down as much as one would
have guessed.

Chapter 2 Tools of Positive Analysis

2.

This is a valid criticism of the exercise study. It reflects the problem of causality.
Two things may be correlated, but it can be difficult to determine which causes the
other. Please add your own judgments based on such information.
3.
The workers who spend time on a computer probably have other skills and abilities
that contribute to higher wages, so training children to use computers would not
necessarily cause their earnings potential to improve. This study illustrates the
difficulty of determining cause and effect based on correlations. Please add your
own judgments based on such information.
4.
The text points out the pitfalls of social experiments: the problem of obtaining a
random sample and the problems of extending results beyond the scope of the
experiment. Please add your own judgments based on such information.
5.
The scenario set up by the change in unemployment lends itself to a difference in
difference approach, in which the first difference is across time and the second
difference is across income level. The researcher would measure the change in
unemployment duration for high earners between the period of lower benefits and
the period of higher benefits, and then compare this change to the change for the
low earners. The treatment group would be the high earners and the control group
would be the low earners. The assumption that must hold for unbiased estimates is
that in the absence of the policy change, both the treatment and control groups
would have experienced the same change in unemployment duration across the
periods preceding and following the policy change.

Chapter 3 Tools of Normative Analysis

6.
a.Social indifference curves are straight lines with slope of 1. As far as
society is concerned, the util to Augustus is equivalent to the util
to Livia.

b. Social indifference curves are straight lines with slope of 2. This

reflects the fact that society values a util to Augustus twice as much
as a util to Livia.

8.

a.
The Los Angeles police could set a response fee equal to the marginal cost.
Please make your own judgments based on such information.
b. One possible rationalization for the program is that foreclosing on
homes leads to negative externalities in the neighborhood. Please make
your own judgments based on such information.
c. There is no economic reason why cherry pies should be regulated,
especially since there are no such regulations for apple, blueberry, or
peach frozen pies. Please make your own judgments based on such
information.
d. It is hard to imagine a basis in welfare economics for this guarantee to
the domestic sugar producers, unless the utilities of sugar producers are
given great weight in the social welfare function. Please make your own
judgments based on such information.
e. This is not an efficient policy. If the problem is that too much water is
being consumed, then the answer is to increase the price of water.
Please make your own judgments based on such information.

11.
a) If the food is evenly distributed between Tang and Wilson, Tang will
have 14.14 units of utility and Wilson will have 7.07 units of utility.
b) If the social welfare function is UT+UW, then the marginal utilities of
both should be equal to maximize social welfare.
Equate
1/2
1/2
MUT=1/(2FT ) to MUW=1/(4FW ) and substitute FT=400-FW.
Therefore, FT=320 and FW=80.
c)

If the utility of both Tang and Wilson must be equal, then set UT=UW
and substitute FT=400-FW and solve. Therefore, FT=80 and FW=320.

12
Although Victorias marginal rate of substitution is equal to Alberts, these are not
equal to the marginal rate of transformation and the allocation is, therefore,
Pareto inefficient. Both people would give up 2 cups of tea for 1 crumpet but,
according to the production function, could actually get 6 crumpets by giving up
2 cups of tea. By giving up tea and getting crumpets through the production
function, both utilities are raised.

Chapter 4 Public Goods

3.
We assume that Cheetahs utility does not enter the social welfare function; hence,
her allocation of labor supply across activities does not matter.
The public good is patrol; the private good is fruit.
Recall that efficiency requires MRSTARZAN + MRSJANE = MRT. MRSTARZAN = MRSJANE = 2.
But MRT = 3. Therefore, MRSTARZAN + MRSJANE (((( MRT. To achieve an efficient
allocation, Cheetah should patrol more.

5.
Aircrafts are both rival and excludable goods, so public sector production of aircrafts
is not justified on the basis of public goods. If policymakers erroneously assume
that the benefits of the mega-jetliner are public, then they would find the efficient
level of production by vertically summing demand curves rather than horizontally
summing demand curves. This causes the benefits to be significantly overstated
and could be used to justify such high costs. Please make your own judgments based
on such information.
6.
It is uncertain that if Pemex were privatized that the situation would lead to a
monopoly situation.
In the case of the telephone company, there was only one provider of telephone
service. In the case of oil production, there would be only one producer in Mexico,
but many competitors providing oil from which Mexico could buy.
Please make your own judgments based on such information.

9. Books are not a public good. They are both rival (two people cannot read a book
at the same time) and excludable (you can keep a person from reading a book). But if
the goods libraries provide are a sense of community or a better educated populace,
these would qualify as public goods. If the public good aspect of the library is to
produce a better educated populace, then perhaps the classic books are a better
choice. Please make your own judgments based on such information.
11.
a)

Zachs marginal benefit schedule shows that the marginal benefit of

a lighthouse starts at $90 and declines, and Jacobs marginal benefit
starts at $40 and declines. Neither person values the first lighthouse
at its marginal cost of $100, so neither person would be willing to pay
for a lighthouse acting alone.
b)
Zachs marginal benefit is MBZACH=90-Q, and Jacobs is
MBJACOB=40-Q. The marginal benefit for society as a whole is the
sum of the two marginal benefits, or MB=130-2Q (for Q40), and is
equal to Zachs marginal benefit schedule afterwards (for Q>40).
The marginal cost is constant at MC=100, so the intersection of
aggregate marginal benefit and marginal cost occurs at a quantity
less than 40. Setting MB=MC gives 130-2Q=100, or Q=15. Net
benefit can be measured as the area between the demand curve and
the marginal benefit of the 15th unit. The net benefit is $112.5 for
each person, for a total of $225.

Chapter 5 - Externalities
3.
The tax raises costs to the producer for producing the final good. These increased
costs would decrease supply, which will increase the price of that final good.
In a cap and trade system, businesses must purchase permits in order to emit carbon.
If the cost of purchasing and using abatement equipment is less than the cost of
buying a permit, the business will use abatement equipment. In either case (buying a
permit or using abatement equipment) cost for the producer increase, decreasing
supply and increasing the price of the final good.
Please make your own judgments based on such information.
4.

a. The number of parties per month that would be provided privately is P.

b. See schedule MSBp.
c. P*. Give a per-unit subsidy of $b per party to induce the correct
number of parties.
d. The optimal subsidy is $b. The total subsidy=abcd. Society comes
out ahead by ghc, assuming the subsidy can be raised without any
efficiency costs. (Cassanovas friends gain gchd; Cassanova loses chd
but gains abcd, which is a subsidy cost to government.)

5.
If a Pigouvian tax were levied where the Coase Theorem held, production would end
up below its efficient level. This is because the producer already internalizes the
externality (due to the Coase Theorem holding) and would produce an efficient
amount in the absence of the tax. Please make your own judgments based on such
information.
8.
The use of the drug to treat sick cows leads to a positive externality (the benefit
enjoyed by air travelers) as well as a negative externality (the costs created by a larger
number of rats and feral dogs). There are many ways to design incentive-based
regulations. Please make your own judgments based on such information.

11.
Private Marginal Benefit = 10 - X
Private Marginal Cost = $5

External Cost = $2
Without government intervention, PMB = PMC; X = 5 units.
Social efficiency implies PMB = Social Marginal Costs = $5 + $2 = $7; X = 3
units.
Gain to society is the area of the triangle whose base is the distance between
the efficient and actual output levels, and whose height is the difference
between private and social marginal cost. Hence, the efficiency gain is (5 3)(7 - 5) = 2
A Pigouvian tax adds to the private marginal cost the amount of the external cost at
the socially optimal level of production. Here a simple tax of $2 per unit will lead
to efficient production. This tax would raise ($2) (3 units) = $6 in revenue.

Chapter 6 Political Economy

1.
a) Below, the preferences for each person.
Person 4

Person 5

Person 3

Person 1

3
Person 2
4

b)

3.

C wins in every pair wise vote. Thus, there is a stable majority

outcome, despite the fact that persons 1, 2, and 3 have
double-peaked preferences.
This demonstrates that although
multi-peaked preferences may lead to voting inconsistencies, this is
not necessarily the case.

a) Neither issue would pass with majority voting as in both cases, two
voters of the three would vote against the each issue because they
receive negative net benefits. This is not efficient because issue X
has a positive total net benefit and should be funded.
b) With logrolling, voters A and B can trade votes. A will vote for issue
Y if B votes for issue X, but C will not vote for either project. Both
issues will pass with two votes for and one against. This is not
efficient because issue Y has a negative total net benefit.
c)

If side payments were allowed A could pay B to vote for issue X (A

would not pay C because C would require a higher payment than B),
and B could pay A or C to vote for issue Y. This would result in the
same inefficient outcome as in b.

d) If side payments were allowed A would have to pay B at least 1 to

vote for issue X. A would only be willing to pay less than 6. B
would have to pay A or C at least 3, but no more than 4 to entice him
to vote for issue Y.
9.
a

With the demand curve of Q=100-10P and a perfectly elastic supply

curve at P=2, then the milk is sold at a price of $2, and a quantity of
80 units is sold.

The marginal revenue curve associated with the inverse demand

curve P=10-(1/10)Q is MR=10-(1/5)Q, while the marginal cost curve is
MC=2. The cartel would ideally produce a quantity where MR=MC,
or 10-(1/5)Q=2, or Q=40. The price associated with a cartel quantity
of 40 units is P=10-(1/10)*40, or P=6.

The rent associated with the cartel is the product of the marginal
profit per unit and the number of units produced. The marginal
profit per unit of milk is $4 (=$6 price - $2 marginal cost), while 40
units are produced. Thus, the rents equal $160.

The most the cartel would be willing to contribute to politicians is the

full economic rent of $160. The cartel situation, the quantity of milk
produced is too low from societys point of view. The deadweight
loss triangle is computed using the difference between the cartel
output and competitive output as the base of the triangle, and the
difference between the cartel price and competitive price as the
height. Thus, the triangle is equal to (1/2)*(80-40)*($6-$2)=$40.

As Figure 6.5 in the textbook shows, the deadweight loss could now
go as high as the sum of the conventional deadweight loss and the
rents, or $160 rents + $80 DWL = $240. This is because, as noted in
the text, rent-seeking can use up resources lobbyists spend their
time influencing legislators, consultants testify before regulatory
panels, and advertisers conduct public relations campaigns. Such
resources, which could have been used to produce new goods and
services, are instead consumed in a struggle over the distribution of
existing goods and services. Hence, the rents do not represent a
mere lump-sum transfer; it is a measure of real resources used up to
maintain a position of market power.

11.
a.The outcome of the first election (M vs. H) is M. The outcome of the
second election (H vs. L) is L. The outcome of the third election (L vs.
M) is M. Majority rule leads to a stable outcome since M defeats
both H and L. Giving one person the ability to set the agenda would
not affect the outcome in this case.
b. With the change in Eleanors preference ordering, majority rule no
longer generates a stable outcome. In a vote between M and H, the
outcome is H. In a vote between H and L, the outcome is L. In a
vote between L and M, the outcome is M. So, giving one person the
ability to set the agenda affects the outcome. For example, Abigail
prefers H, so she might pit L against M first in order to eliminate L and
avoid having L defeat H.

Chapter 8 Cost-Benefit Analysis

1.
Please make your own judgments based on such information.

3. The present value of $25/.10 = $250.

The present value of the perpetual annual benefit = B + B/(1 + r) + B/(1 + r) 2
+ = B (r + 1 - r)/r = B/r.
5.

a. Bill is willing to pay 25 cents to save 5 minutes, so he values time at 5

cents per minute. The subway saves him 10 minutes per trip, or 50
cents. The value of 10 trips per year is $5. The cost of each trip is 40
cents, or $4 per year. The annual net benefit to Bill is therefore $1.
The present value of the benefits = $5/.25 = $20; the present value of the
costs is $4/.25 = $16.
b. Total benefits = $20x55,000=$1,100,000.
Total costs = $16x55,000 = $880,000.
Net benefits = $220,000.
c. Costs = $1.25 x 55,000 = $68,750.
Benefits =($62,500/1.25) + ($62,500/1.252) = $90,000.
Net benefit = $21,250.
d. The subway project has a higher present value. If a dollar to the poor
is valued the same as a dollar to the middle class, choose the subway
project.
e. Let ( = distributional weight. Set
220,000 = -68,750 + ([(62,500/1.25) + (62,500/1.252)]
( = 3.21
This distribution weight means that $1 of income to a poor person must be
viewed as more important than $3.21 to the middle class for the legal
services to be done.

6. $100 billion invested for 100 years at 5 percent per year would generate over $13
trillion, a little more than twice the $700 billion in damage caused by the climate
change. There might be other considerations offered when evaluating this
proposal, but the critic is correct from a financial standpoint.

Chapter 9 The Health Care Market

1.

Economists do not care about the cost of health care per se. Rather, the issue is
whether there are distortions in the market that lead to more than an efficient
amount being consumed. Second, it makes a lot of difference how money is spent.
Thus, employment in the health care sector is not desirable in itself. It is desirable to
the extent that it is associated with the production of an efficient quantity of health
care services. Please add your own judgments based on such information
4.
Please add your own judgments based on such information Because the demand for
this drug seems perfectly inelastic, there is no moral hazard problem with a third
party payer (insurance provider, for example) providing the drug. Providing this drug
to patients through a third-party payer meets the condition for efficient insurance.
6.
a. P=100-25Q=$50, so Q=2 visits per year. Total cost is ($50)(2) = $100.
b. With 50 percent coinsurance, the individual pays $25 per visit and the
quantity demanded is 3 visits per year. The individuals out-of-pocket
costs are $75 and the insurance company pays $75 ($25 per visit, 3
visits per year).
c. The introduction of insurance caused the quantity demanded to
increase from 2 to 3 because the individuals effective price fell from
$50 to $25, but the marginal cost is still $50 per visit. The individual
consumes medical services past the point where the marginal benefit
to the individual equals the marginal cost, leading to inefficiency or
deadweight loss. The marginal cost of the third visit is $50, but the
marginal benefit is $25, so the deadweight loss is equal to this
difference, or $25. If the method presented in Figure 9.4 is applied,
the deadweight triangle will
have an area equal to $12.50.
If the marginal benefit of visiting the doctor is $50, there is no deadweight loss
because marginal benefit equals marginal cost.
Chapter 11 Social Security

3.
Use the basic formula for balance in a pay-as-you-go social security system:
t =(Nb/Nw)*(B/w).
Call 1990 year 1 and 2050 year 2.
t1 = .267*(B/w)1
t2 = .458*(B/w)2

Then

It follows that to keep (B/w)1=(B/w)2 we require t2/t1=.458/.267=1.71. That

is, tax rates would have to increase by 71 percent. Similarly, to keep the
initial tax rate constant, we would require (B/w)2/(B/w)1=.267/.458=0.58.
Benefits would have to fall almost by half.
4
Social Security redistributes incomes from younger generations to older
generations, from men to women, from high- to low-income individuals, and
from two-earner to one-earner married couples.
Social Security benefits older generations because it is largely financed on a
pay-as-you-go basis. The most extreme example is Ida Fuller, the first Social
Security beneficiary, who paid only $24.85 and received benefits of $20,897
over her lifetime.
Please add your own judgments based on such information

7.
The statement about how the different rates of return in the stock market and
government bond market affect the solvency of the trust fund is false. If the trust
fund buys stocks, someone else has to buy the government bonds that it was holding.
So, there is no new saving and no new capacity to take care of future retirees. Please
add your own judgments based on such information
8.
a. The problem does not provide information about the utility function, so
the optimal point is where the indifference curve is drawn tangent to
the budget line, which can occur at different values depending on how
the curve is drawn. In the diagram below, the optimal point involves
saving $8,000 and future consumption consists of period 2 income
($5,000) plus savings with interest ($8,800).

Future
Consumption
$27,000

$13,800

Optimal Point

Endowment
Point

$5,000

$12,000

$20,000

$25,545

If Social Security takes $3,000 from the individual in the first period and pays
him this amount with interest in the second period, then private savings falls
from $8,000 to $5,000. There would be no change in optimal consumption
values.

Chapter 12 Income Redistribution:

Conceptual Issues

Utilitarianism suggests that social welfare is a function of individuals utilities.

Whether the rich are vulgar is irrelevant, so this part of the statement is
inconsistent with utilitarianism. On the other hand, Steins assertion that
inequality per se is unimportant is consistent with utilitarianism. Please add
your own judgments based on such information

Present
Consumption

To maximize W, set marginal utilities equal; the constraint is Is + Ic = 100.

So, 400 - 2Is = 400 - 6Ic, substituting Ic = 100 - Is gives us 2Is = 6 (100
Is). Therefore, Is = 75, Ic = 25.
If only Charity matters, then give money to Charity until MUc = 0 (unless
all the money in the economy is exhausted first). So,400-6 Ic = 0;
hence, Ic = 66.67. Giving any more money to Charity causes her
marginal utility to become negative, which is not optimal. Note that
we dont care if the remaining money ($33.33) is given to Simon or
not.
If only Simon matters, then, proceeding as above, MUs. 0 if Is = 100;
hence, giving all the money to Simon is optimal. (In fact, we would
like to give him up to $200.)
MUs = MUc for all levels of income. Hence, society is indifferent among all
distributions of income.

6.
a.

False. Society is indifferent between a util to each individual, not a

dollar to each individual. Imagine that UL=I and UJ=2I. Then each
dollar given to Jonathan raises welfare more than the same dollar
given to Lynne.
b. True. The social welfare function assumes a cardinal interpretation
of utility so that comparisons across people are valid.

c.

False. Departures from complete equality raise social welfare to

the extent that they raise the welfare of the person with the
minimum level of utility. For example, with the utility functions UL=I
and UJ=2I, the social welfare function W=min[UL,UJ] would allocate
twice as much income to Lynne than Jonathan.

Chapter 14 Taxation and Income Distribution

5.
Before-tax equilibrium: P = $10 and Q = 300,000
QD=QS
500,000-20,000P=30,000P
500,000=50,000P
P=10
Q=30,000*10=300,000

After-tax equilibrium: P = $10.60 and Q = 288,000, producers receive

$9.60
500,000-20,000P=30,000(P-1)
530,000=50,000P
P=10.6
Q=30,000*(10.6-1)=288,000
Revenue = $288,000. Consumers bear 60 percent of the tax burden and
producers bear 40 percent. So, $172,800 comes from consumers and
$115,200 from producers.
With a more elastic demand curve, quantity consumed will decrease even
more as a result of the tax, so the liquor tax will be more effective at
reducing consumption among young drinkers.

7.
a.

A part-time worker with annual income of $9,000 pays no taxes

since everyone gets a $10,000 deduction. Her marginal tax rate is
0% and her average tax rate is 0%.

b.

A retail salesperson with annual income of $45,000 has taxable

income of $35,000 and pays $1750 in taxes (5 percent of taxable
income). As a percentage of income, the average tax rate is 3.89%
($1750 is 3.89% of $45,000). Her marginal tax rate is 5%.

c.

An advertising executive with annual income of $600,000 pays

$2,500 in taxes since no tax is levied above $50,000 in taxable income.
As a percentage of income, the average tax rate is 0.42%. Her
marginal tax rate is 0%.

The tax is initially progressive, but because of the cap on taxable income,
becomes regressive.
8.
The equation T=-4000+.2I is somewhat similar to the exercise in Table 14.1. If
we follow the text and define progressivity with respect to average tax rates
rather than marginal tax rates, then the average tax rate equal ATR=(-4000/I)+.2
for any income level. Clearly this average tax rate converges to ATR=20% as
income gets large, and is lower for lower income levels. The tax system is
regressive. Replicating Table 14.1 for the tax system given here, we get:

Income

Tax Liability

Average Tax Rate

$2,000
3,000
5,000
10,000
30,000

$-3,600
$-3,400
$-3,000
$-2,000
$2,000

-1.80
-1.13
-0.60
-0.20
0.066

Marginal Tax
Rate
0.2
0.2
0.2
0.2
0.2

To show that the tax system is progressive if a is negative, write ATR as:
ATR = T/I = (a + TI)/I = a/I + t

Then take the derivative of ATR with respect to I in order to check whether
ATR goes up or down as I increases: d(ATR)/dI = d(a/I + t)/dI = -a/I2. The
change in average tax rate is increasing in income (which implies a
progressive tax schedule) as long as a is negative.

10.
It makes sense for the government to do this if demand is elastic or supply is
fairly inelastic because the producer would bear a higher percentage of the tax
paid. Please add your own judgments based on such information

Chapter 15 Taxation and Efficiency

1.
a. The supply of land is fixed, or perfectly inelastic, so there is no excess
burden because the lower price that sellers receive does not cause
quantity supplied to fall.
b. The use of cell phones is probably fairly price-elastic, which implies
that the excess burden could be large.
c. It is possible that companies could identify themselves as high-tech in
order to receive the subsidy. Thus, the supply is quite elastic, and
there will be substantial excess burden.
d. Consumers and sellers will likely agree to avoid cups and glasses in
order to avoid the tax. A tax that is easily avoided does not have
much of an impact, except to create some inconvenience, and does
not raise revenue.
e. Card companies can easily increase or decrease the number of cards
in a pack, avoiding the tax and reducing the excess burden.
f. There are many good substitutes for blueberries. Therefore, their
demand is quite elastic, and a tax on them will have a substantial
excess burden, relative to the size of revenues collected.
4.
The quote is misleading. The way in which the presence of the t-squared makes
the tax more important is that when the tax increases, the excess burden
increases with its square. Thus, when the tax doubles, the excess burden
quadruples.

7.
The cap and trade program would likely cause the cost of producing many
consumer goods to increase. By changing prices in this way, the program may
induce an excess burden. However, if the program succeeds in addressing a
significant externality, the distortion in status-quo prices may actually succeed in
bringing consumption closer to the efficient level.
As to the cap and trade revenues, distributing the revenues via a lump sum
transfer would have no impact on excess burden. Please add your own
judgments based on such information
11.
a.The value of the marginal product of capital in the corporate sector is
given by VMPc=100-Kc, and the value of the marginal product of
capital in the noncorporate sector is given by VMPn=80-2Kn. With 50
units of capital altogether in society (Kc+Kn=50), and no taxation,
capital should be allocated so that the values of the marginal products
in each sector are equalized. Thus, setting VMPc=VMPn gives
100-Kc=80-2Kn and substituting in the constraint of 50 units gives
100-50+Kn=80-2Kn or Kn=10. This implies that Kc=40. This is
illustrated below:

VMPCORPORATE

Allocation of capital to the corporate

and non-corporate sectors
VMPNONCORPORATE

100

80

VMPN=80-2KN

QCORPORATE

VMPC=100-KC

KC=40
KN=10

QNONCORPORATE

b. If a unit tax of $6 is leveled on capital employed in the corporate

sector, the after-tax value of the marginal product in the corporate
sector falls. It is now given by VMPc=100-Kc-6=94-Kc. Now setting
VMPc=VMPn gives 94-Kc=80-2Kn and substituting in the constraint of
50 units gives 94-50+Kn=80-2Kn or Kn=12. This implies that Kc=38.
This is illustrated below:

VMPCORPORATE

FIGURE 13.7b Reallocation after

per-unit tax on corporate capital
VMPNONCORPORATE

100

94
80

Excess burden from

$6 per unit tax

VMPN=80-2KN

QCORPORATE

VMPC=94-KC
KC=38
KN=12

QNONCORPORATE

Thus, K=2 and the tax wedge is t=$6, so the excess burden is (2)($6)=$6.

Chapter 16 Efficient and Equitable Taxation

Assuming that all other commodities (except for cable and satellite television)
were untaxed, then optimal tax policy suggests the commodities should be
taxed according to the inverse elasticity rule. Goolsbee and Petrin (2004)
find that the elasticity of demand for basic cable service is -0.51, and the
demand for direct broadcast satellites is -7.40. Applying the inverse
elasticity rule would imply that:

(tBASIC/tSATELLITE)=(SATELLITE/BASIC)=(7.40/0.51)=14.5

Thus, tax rates on basic cable should be 14.5 times higher than tax rates on
satellite television because basic cable is inelastically demanded, while
demand for satellite television is highly elastic. Please add your own
judgments based on such information

Luxury cars have a higher demand elasticity than basic transportation, so this tax
would be less efficient (have a larger excess burden) compared, for example,
to a tax on the first $10,000 of any car purchase. Although the tax schedule is
progressive, the incidence is not clear at all. This is determined by the
relative demand and supply elasticities for expensive cars. Administration of
this tax would not be straightforward: One could imagine methods of
evasion such as misrepresenting invoices or selling the car in parts!
The beard tax was progressive because it was a function of social position, which
was probably a good proxy for income. Because the tax attempted to treat
people with the same income similarly, it satisfied some level of horizontal
equity, even though it penalized those with a preference for facial hair.
Its hard to know about the efficiency consequences unless one knows more
about the price elasticity of demand for the privilege of having a beard. If
the elasticity was small, then it would be an efficient tax. Please add your
own judgments based on such information

If the nut fee is truly collected whether or not the farmer collects nuts, then it is
independent of the farmer's behavior. Hence, it is a lump-sum tax, and
perfectly efficient (unless it drives some individuals out of farming).
However, optimal tax theory tells us that we must consider equity as well as
efficiency considerations. Please add your own judgments based on such
information