Question

When taxes are levied on transactions, irrespective of the party they are levied on, a. ​The government can absorb some of the surplus, but also creates a social loss since some of the wealth creating transactions are discouraged b. ​The government can absorb all the consumer surplus from the transactions as revenue c. ​The government can absorb all of the surplus (producer and consumer) d. ​The government can absorb all the producer surplus from the transactions as revenue

Answer 1

Answer:

a. ​The government can absorb some of the surplus, but also creates a social loss since some of the wealth creating transactions are discouraged.

Explanation:

When a government applies tax levied to all products irrespective not the parties that are being taxed, the poor will be taxed the same way rich people are taxed. This will result in financial hardships for the portion of the population that do not have much resources. It will result in more revenue for the government.

The adverse effect of this is that the lower class will be discouraged from performing transactions that are viewed to be too expensive.

The upper class though will have no problem with this as they can easily bear the tax.

A good strategy will be to implement differential taxing where economic level of the parties performing the transaction is considered.