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Suppose a tax is levied on Muhammad which reduces his real income. The money collected is used to provide a public good which restores his
Suppose a tax is levied on Muhammad which reduces his real income. The money collected is used to provide a public good which restores his utility to exactly the same level it has been prior to the tax. Compared to his original work effort, Muhammad will now work Group of answer choices either more or fewer hours, depending on the relative strengths of the income and substitution effects. fewer hours because the income effect of the public good exactly offsets the income effect of the tax, leaving only the substitution effect of the lower net wage. more hours because the substitution and income effects reinforce one another. more hours because the income effect of the public good exactly offsets the income effect of the tax, leaving only the substitutions effect of the lower net wage
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