Economic Paper

WA 2 Hints

For Prompt 1

• The Benefits-Received Principal • People who receive the benefits from a government program should pay the tax that support

the program.

• The Ability-to-Pay Principle • Vertical equity – greater share of the tax burden should be borne by people who have a

greater ability to pay.

• The Horizontal-Equity Principle • Similar people should be treated the same.

• Attaining Social Objectives • Discourage certain activities to fulfill a certain social objective.

For Prompt 2 • Tax Incidence

• The division of the burden between buyers and sellers in the market.

• Who pays how much depends entirely on the Price Elasticity of Demand.

• When Demand for a product is less elastic than supply, consumers pay the majority of the tax.

• When Demand for a product is more elastic than supply, firms pay the majority of the tax.

For Prompt 2 cont.

• Basically, if Demand is more elastic than Supply, Supply will pay most of the tax.

• If Demand is less elastic than Supply, Demand will pay most of the tax.