In the absence of taxes, Jane would prefer to purchase a large four-wheel drive (4WD).However, the government has recently decided to place a $10 000 nuisance tax on 4WDs.Which of the following statements best reflects the effect of this tax if Jane decides to purchase a small economy car as a result of the tax?
A)other people who choose to purchase 4WDs 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 4WDs
C)all deadweight losses are mitigated if there is a net decrease in air pollution
D)Jane is worse off, and her loss of welfare is part of the deadweight loss of the tax

Question

Quizplus · Accepted Answer

The tax results in Jane being worse off because she now has to purchase a smaller car instead of her preferred 4WD. Her loss of welfare is part of the deadweight loss of the tax. The deadweight loss is the loss of welfare to society that results from the tax creating a distortion in the market. Even if some people continue to purchase 4WDs, there will still be deadweight losses. A net decrease in air pollution, while desirable, is not necessarily the only or primary goal of the tax. Therefore, option D is the best choice.

In the Absence of Taxes, Jane Would Prefer to Purchase