In the absence of taxes,Janet would prefer to purchase a large sport utility vehicle (SUV).The government has recently decided to place a $10,000 nuisance tax on SUVs.If Janet decides to purchase a small economy car as a result of the tax,which of the following statements is correct?

Question

Quizplus · Accepted Answer

Janet's loss of welfare is a part of the deadweight loss of the tax. When the tax is imposed, Janet is forced to either pay the higher price for the SUV or switch to another car. In this case, Janet decides to purchase a small economy car which may not fully satisfy her needs or preferences. Hence, she incurs a loss of welfare. This loss of welfare is a part of the deadweight loss of the tax. Therefore, option D is correct. Option A is incorrect because deadweight loss is not incurred by people who choose to purchase SUVs, but by the society as a whole. Option B is incorrect because there are always some deadweight losses associated with any tax. Option C is incorrect because the calculation of deadweight loss involves comparing the loss of welfare to the revenues generated by the tax.

In the Absence of Taxes,Janet Would Prefer to Purchase a Large