In the absence of taxes,Janet would prefer to purchase a large sport utility vehicle (SUV).However,the government has recently decided to place a $10,000 nuisance tax on SUVs.Which statement best reflects the effect of this tax if Janet decides to purchase a small economy car as a result of the tax
A)Other people who choose to purchase SUVs will incur the cost of the deadweight loss of the tax.
B)There are no deadweight losses as long as some people still choose to purchase SUVs.
C)All deadweight losses are mitigated if there is a net decrease in air pollution.
D)Janet is worse off, and her loss of welfare is part of the deadweight loss of the tax.

Question

Quizplus · Accepted Answer

The best choice is D because the introduction of the $10,000 tax on SUVs has deterred Janet from purchasing the SUV she originally preferred. As a result, she is now worse off as she will have to settle for a less preferred alternative (small economy car). This reduction in her welfare represents part of the deadweight loss of the tax. Deadweight loss is the loss of economic efficiency that occurs when the actual level of economic activity is below the optimal level that would be achieved in a market without a tax. In this case, the tax has caused a reduction in economic activity by deterring some consumers from purchasing SUVs, resulting in a deadweight loss. The other options do not accurately reflect the effect of the tax on Janet's decision or the deadweight loss that results from the tax.

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