Question

When the government imposes a tax on a firm that generates external costs, the tax is A) always borne entirely by the firm. B) always borne entirely by the consumer. C) usually borne by both the firm and the consumer. D) borne only by the government.

Answer 1

Answer:

C) usually borne by both the firm and the consumer.

Explanation:

Taxation can be defined as the involuntary or compulsory fees levied on individuals or business entities by the government to generate revenues used for funding public institutions and activities.

There are three (3) types of taxation used by the government, these are;

1. Progressive taxation: it involves charging individuals having higher incomes a higher percentage of their total income.

For instance, John pays 30% on $70,000 and Joyce pays 10% on $45.000.

2. Proportional taxation: it involves charging both lower and higher income earners equally in proportion to their income.

For instance, John pays 20% on $50,000 and Joyce pays 20% on $36,000.

3. Regressive taxation: it involves charging individuals with low incomes a higher percentage of their total income and vice-versa.

For instance, John pays 15% on $60,000 and Joyce pays 20% on $36,000.

When the government imposes a tax on a firm that generates external costs, the tax is usually borne by both the firm and the consumer.

This ultimately implies that, the tax incidence falls on both the manufacturer or producer of the goods and services, as well as the consumers of these finished goods.