INSTRUCTOR DISCUSSION NOTES:
Why Is This 18th Century Relic Still Around?

1. Why would this tax on stock share transactions lower the share price? Use a graph of supply/demand to illustrate your answer.

Graph should illustrate a wedge between share price paid by the buyer, and share price received by the seller - difference is the amount of the tax. Market share price should be lower than it was before to offset part of the tax.

2. Suppose the British government decided to eliminate this stamp duty, and replace the lost revenues by raising proportionately the corporate income tax. Trace the possible outcomes of this action to determine its appropriateness.

Answers may vary. Focus on income elasticity, ability of firms to expatriate income to avoid a tax, etc.

3. Some have suggested that our tax systems should be scrapped in favor of one system that taxes all economic transactions the same, regardless of the particular transaction. What do you think would happen under such a system?

Difficulty would lie in determining how to tax "economic transactions." Your purchase of the EconNews packet is a transaction that should be taxed. But should your trade of your econ textbook for a pair of shoes be taxed as well?

Multiple Choice/True False Questions

1. How would you describe elasticity of demand for stock shares, based on this information?
  1. Perfectly inelastic
  2. Relatively inelastic
  3. Relatively elastic
  4. Perfectly elastic.
ANS . b

2. What happens to the consumer and producer surplus as a result of the imposition of this tax?
  1. Consumer and producer surplus both increase.
  2. Consumer surplus rises at the expense of producer surplus.
  3. Producer surplus rises at the expense of consumer surplus.
  4. Consumer and producer surplus both fall.
ANS . d

3. True/False. This tax increases investment in British firms.

ANS . False

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