Question

1. It has been argued that Senior Citizens should pay lower prices for telephone service through per-unit subsidies which are financed by higher taxes on telephone service for working adults. As an economist what would you propose?

a) Agree with the proposal because it improves the equality wealth in society.

b) Disagree with the proposal in principle because redistribution of income is always inefficient.

c) Argue for a new proposal that gives a lump-sum subsidy to Senior Citizens financed through a lump-sum tax on working adults since this allows the market to allocate resources efficiently through market prices.

d) Let Senior Citizens and Working Adults negotiate between themselves so that they can trade with each other to reach a Pareto Efficient allocation.

Answer 1

The right answer is c. c) Argue for a new proposal that gives a lump-sum subsidy to Senior Citizens financed through a lump-sum tax on working adults since this allows the market to allocate resources efficiently through market prices.

Giving people (both working adults and the senior citizens) a choice in what they want to consume more or less is possible if they are given / charged a lump sum amount of money instead of a service whose consumption they need to increase / decrease to affect their own welfare.