True or False?
The statement is false. The supply of land is perfectly inelastic in the production of each of the goods. The price of land in the taxed industry will therefore fall by the amount of the tax and the marginal costs of labour and capital will remain unchanged. The decline in the demand for land that is taxed results in a fall in the rent to that land but no reduction in the quantity of it used since it cannot be used in the other industry. The marginal cost of labour in the taxed industry will be unaffected, so the quantity of labour employed and the level of output in that industry will remain unchanged. Since output does not change, neither will the level of utility and the marginal utilities of the two goods.
The only situation in which there would be an output effect would be one in which the initial rents to the land being taxed are less than the amount of tax imposed. In this case some of the taxed land would have to be taken out of production.