Elite charge lump-sum taxes to middle-class entrepreneur

Reference no: EM131139648

(a) Consider the economy with political replacement in Section 22.4.2. Suppose Condition 22.1 fails to hold and φ = 0. Show that in any MPE or SPE, the elite prefer to block technology, that is, g = 0.

(b) Suppose that in this proposition φ is not equal to 0. Provide an example in which in the MPE, the elite would still prefer g = 0.

(c) Now suppose that the elite can charge lump-sum taxes to middle-class entrepreneurs. Provide an example in which in the MPE, the elite would still prefer g = 0. Explain why the political equilibrium might involve the use of inefficient fiscal instruments, even when more efficient alternatives exist.

Reference no: EM131139648

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