Question

Raising taxes and increasing welfare payments ________.

1) reduces market power
2) proves that there is such a thing as a free lunch
3) improves efficiency at the expense of equity
4) none of these answers
5) improves equity at the expense of efficiency

Answer 1

Raising taxes and increasing welfare payments are generally considered to improve equity at the cost of efficiency, but may sometimes promote economic growth and build social support for market economies.

Step-by-step explanation:

Raising taxes and increasing welfare payments generally aim to improve equity at the potential expense of economic efficiency. The principle behind this is that government interventions to reduce income inequality, such as high taxes on the wealthy to fund welfare programs, may deter high earners by reducing their incentives, which could potentially lead to a lower economic output. However, this view can sometimes be too simplistic, as certain measures, like public education, can both improve equity and contribute to economic growth. Moreover, these policies can build social support for market economies by demonstrating effort towards reducing inequality. Therefore, the correct answer to the student's question would be option 5, 'improves equity at the expense of efficiency.'