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 some calculations 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) Horizontal equity
C) Substitution effect
D) Vertical equity
E) None of these

Question

Quizplus · Accepted Answer

The substitution effect explains that consumers may change their purchasing behavior in response to changes in relative prices, potentially leading to fewer SUV purchases and thus less tax revenue than anticipated.

Al Believes That SUVs Have Negative Social and Environmental Effects