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The income tax incidence e. Does the regular supply curve provide a good estimate of the...

The income tax incidence e. Does the regular supply curve provide a good estimate of the excess burden of the tax? Why or why not? f. Does the change in the number of hours worked as provided by the compensated labor supply curve exceed the change under the regular supply curve?

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Answer #1

No, regular supply curve does not provide a good estimate of the excess burden of the tax in terms of labor supply curve but compensated does.

Labor supply curve not only accounts for labor per hours but also leisure per hours available. And by economic principle, Labor is a bad good and leisure is a good good. So higher the incidence of tax less incentives for labor to work and more incentives for leisure to enjoy. But this can happen only after a certain point. This can be shown through the backward bending labor supply curve.

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