Consider two individuals, a rich individual and a poor individual) and two types of goods: public goods and private goods.

a) Explain the effects of proportional taxation assuming that the income effect of the poorer individual dominates the substitution effect with the help of a well-labelled diagram.

b) Explain the effect of a lump-sum taxation on the individual’s choice of most preferred level of government expenditure with the help of a well-labelled diagram.