Suppose the Government Considers Imposing a Tax on Two Types

question 62

Essay

Suppose the government considers imposing a tax on two types of goods: luxury goods and necessity goods. Luxury goods have a higher elasticity of demand than necessity goods. Does a tax on luxury goods have a greater deadweight loss than a tax on necessity goods?

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Definitions:

Machinery

Physical devices or equipment designed to perform specific tasks in industrial or commercial settings, often part of the fixed assets of a business.

Soft Rationing

The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.

Hard Rationing

The situation that occurs when a business cannot raise financing for a project under any circumstances.

Hard Capital Rationing

A situation where a company is unable to secure additional funding from external sources like equity or debt markets.