ECONOMICS 4316/7316 Problem Set #4-5
TRUE OR FALSE (no explanation required or considered in grading) (note: if the statement
is not always true, then the answer is “false”) (note: do not assume that some share of the
questions must be true vs. false – they could all be true, they could all be false, they could be half
true and half false, they could be disproportionately true, etc. – just answer the question)
1. (3) If a perfect Tiebout equili
ium exists (every person within each jurisdiction has identical
preferences), the result will be an efficient amount of the public good in each location (i.e., meets
the Samuelson Condition).
2. (3) If the requirements of the Median Voter Theorem hold, majority voting for the amount of a
public good to provide results in an efficient outcome (i.e., meets the Samuelson Condition).
3. (3) The empirical evidence provided by Gramlich and Rubinfeld XXXXXXXXXXand Wallace Oates
(2006) supports Tiebout-like sorting (meaning that the variance in preferences within
communities is usually smaller than the variance across communities).
4. (4) The economic incidence of a subsidy (who actually gets the subsidy) is totally independent
of the statutory incidence of the subsidy (who is legally offered the subsidy).
5. (3) Alaskans do not pay sales tax.
6. (3) The net welfare gain associated with subsidizing producers to manufacture the COVID-19
vaccine is the external benefit that arises because the subsidy increases the number of people
who get the vaccine (you may need to draw a picture [for yourself, not the problem set]).
7. (3) In the prior case (question 5), if marginal costs are constant, the producer does not gain
from the subsidy (assuming here that they are not also consumers).
8. (3) There already exists a legal obligation to pay tax on remote sales, even if the seller
(vendor) does not have nexus (defined as a physical presence) in the state. (think thoroughly
about this question)
9. (3) One difference between the (invoice-credit) VAT and the retail sales tax as levied in the
United States is that intermediate inputs may be fully taxed under the retail sales tax, while
intermediate inputs are effectively (after any credits, etc.) untaxed under the VAT.
XXXXXXXXXXReliance on the sales tax for state and local governments (combined) is highest in
Tennessee.
XXXXXXXXXXMost states exempt food for consumption at home (i.e., bought at a grocery store) from
the retail sales tax (ignore the treatment of candy and soda).
XXXXXXXXXXIf an ad valorem tax is imposed on a good where the demand elasticity εp = 0, consumers
will bear the entire burden of the tax.
XXXXXXXXXXMost states that have a retail sales tax have sales tax holidays at least once per year.
XXXXXXXXXXThe less elastic is demand for a taxed product, all else equal, the less revenue the
government collects from taxing the product.
XXXXXXXXXXEmpirical research suggests that most, if not all of the retail sales tax is shifted by sellers
to the consumer.
ECONOMICS 4316/7316 Problem Set #4-5
XXXXXXXXXXThe state sometimes audits consumers for compliance with the retail sales tax.
XXXXXXXXXXIn a vote on how much of a public good to provide, if preference for the amount of the
good is monotonically (i.e., consistently) increasing in in income, and assuming every body
votes, the person with median income will be the median voter.
XXXXXXXXXXThe transfer of income from consumers to the government as tax is paid will entail a loss
is social welfare.
SHORT ANSWER
1. (6)Which of the following people exhibit single-peaked preferences?
[a] [b] [c] [d]
For questions 2-3, consider the chart below. Assume that a subsidy = s is imposed in the
market. The statutory incidence is on the consumer.
2. (5) What is the amount of consumer surplus gained because of the subsidy [use appropriate
letter(s)(e.g., “a”, “a + b”, “c – d”) or write “zero”]?
3. (5) What is the amount of producer surplus gained because of the subsidy [use appropriate
letter(s)(e.g., “a”, “a + b”, “c – d”) or write “zero”]?
4. (5) What is the amount of the subsidy that is paid out [use appropriate letter(s)(e.g., “a”, “a
+ b”, “c – d”) or write “zero”]?
5. (5) The subsidy results in a(n) excess burden (net social benefit, excess burden), which is
equal to [use appropriate letter(s)(e.g., “a”, “a + b”, “c – d”) or write “zero”]
U(G)
G
U(G)
G
U(G)
G
U(G)
G
ECONOMICS 4316/7316 Problem Set #4-5
6. (6) Fill in the missing values in the table below. Assume a 10 percent VAT
Individual Input Purchases Sales VAT Paid to Seller Credit Net VAT Paid
Vendor XXXXXXXXXX
Vendor 2 (a) 30 (b) (c) (d)
Vendor 3 (e) 60 (f) (g) (h)
Vendor 4 (i) 70 (j) (k) (1)
Consumer 70
7. (6) The most typical (
oad classes) of goods on which selective sales (excise) taxes are levied
are ____________, ____________, and ____________.
8. (6) Two reforms that would make the retail sales and use tax more efficient are to (answers
may vary) ____________ and ____________.