Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions. He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs. Al performs somecalculations and comes to the conclusion that based on the current number of SUVs owned in the U.S. exactly the same amount of total sales tax will be collected under his reformed system. Which of the following concepts explains why Al's idea may not work?
A) The ability to pay principle.
B) Substitution effect.
C) Vertical equity.
D) Horizontal equity.
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

The substitution effect suggests that if the price of SUVs increases due to higher sales taxes, consumers may switch to buying other larger vehicles, such as trucks or vans, that are not subject to the same tax increase but still have negative social and environmental effects. This means that Al's proposed higher sales taxes on SUVs may not achieve his desired outcome of reducing carbon monoxide emissions.

Al Believes That SUVs Have Negative Social and Environmental Effects