Asked by Terry Valentine on May 02, 2024
Verified
In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor. The government has recently decided to place a tax on boats with 75 hp motors or higher. If Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the following statements is correct?
A) Other people who choose to purchase large boats 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 large boats.
C) The deadweight loss will decrease as a result of an increases in Carlos's consumer surplus.
D) Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.
Deadweight Loss
An economic inefficiency that occurs when a market does not reach equilibrium, leading to a loss of total social welfare.
Consumer Surplus
The difference between the total amount consumers are willing to pay for a good or service and the total amount they actually pay.
- Gain insight into the concept of deadweight loss in the scope of taxation and its implications for surplus.
- Review the impact that taxation has on choices made by consumers and on the dynamics of market operations.
Verified Answer
JM
Julia Maxwell
May 06, 2024
Final Answer :
D
Explanation :
Carlos is worse off because he had to alter his original preference due to the tax, and this change in behavior leads to a loss in welfare for him, which is considered part of the deadweight loss associated with the tax.
Learning Objectives
- Gain insight into the concept of deadweight loss in the scope of taxation and its implications for surplus.
- Review the impact that taxation has on choices made by consumers and on the dynamics of market operations.