The Principle of Second Best States That

question 11

Multiple Choice

The principle of second best states that

• A) if previously existing distortions exist, a distortionary tax may actually improve efficiency.
• B) the broader based the tax, the less distortionary it is.
• C) the more inelastic the demand for a product, the less distortionary a tax on the product would be.
• D) taxes should be constructed so that they are neutral.

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Definitions:

Service Cost

The actual cost incurred to provide a service, including labor, materials, and overhead expenses.

Cumulative Unrecognized

Accumulated amounts of certain expenses or revenues that have not yet been recognized in a company's financial statements.

Amortization

The process of gradually writing off the initial cost of an asset over a period, often used for intangible assets.

Corridor

A method used in pension accounting to amortize certain actuarial gains and losses over time.