True, False, Explain: Indicate if you believe each statement is true or false, t

Question

True, False, Explain: Indicate if you believe each statement is true or false, then give a short explanation for your answer. 1. Decreasing taxes can increase government tax revenue. 2. In a free market the quantity of a good that produces an externality will always be greater than is socially optimal. 3. The Coase theorem implies that regardless of how rights are assigned, the outcome of a negotiation is the same. 4. If demand is relatively more elastic than supply, producer surplus will be greater than consumer surplus. (This might be easiest with a graphical proof, but can be explained in words as we ll.) 5. When an economist says a country would experience "gains from trade" they mean everyone in the country will benefit if the country opens to trade.

Explanation / Answer

1. True. The Laffer curve shows the relation between tax rate and government tax revenue. It is downward U shaped. Hence, for high tax rate, a reduction in tax rates would increase government tax revenue.

2. False. If the good produces a positive externality ten free market quantity of that good will be less than is socially optimum.

3. True. Coase Theorem states that socially optimum outcome would be reached irrespective of who the rights are assigned to.

4. True. When demand curve is elastic then consumer suprlus is low. Hence, producer surplus would be greater than consumer surplus.

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