Question 1: State whether the following statements are true or false- 5 Marks (0.5 Mark each). 6 7 8 9 10 5 1. An income tax which discriminates between incomes is likely to cause inefficiency 2. External cost would exist where an industrial firm for example imposed costs on the surrounding community in the form of air pollution for which the firm did not have to pay. 3. A lump sum tax is a fixed amount of taxes assessed equally on all taxpaying entities regardless of their income and wealth level. 4. Efficiency means that the resources are organized so as to produce the largest possible amount of the goods and services that people want to purchase. 5. Simple average method used in case of progressive tax and no loss to cancel substitution effect 6. Substitution effect represents the transfer of resources from the tax payer to the firms. 7. A lump sum tax would be proportional with respect to income where the rich person pays more amount of tax with respect to a poor person. 8. The income effects of taxes can lead to economic inefficiency because they interfere with the consumer choice. 9. Lump sum tax is considered indirect tax that, cause the net prices received by the sellers of goods or services to diverge from the gross prices paid by the buyers. 10. A per unit tax is an example of price distorting tax