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)In order to determine the size of the deadweight loss, we must add the revenues from the tax to the loss in Carlos's consumer surplus.
D)Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.

Question

Quizplus · Accepted Answer

Carlos is worse off because he had to settle for a smaller boat that he did not prefer, and this loss of welfare is part of the deadweight loss of the tax. Deadweight loss is the loss in total surplus that occurs when the quantity of a good sold is below the efficient equilibrium quantity. In this case, the tax on larger boats may lead to fewer boats being sold and a loss of welfare for consumers. Option A is incorrect because the deadweight loss is not incurred only by those who choose to purchase larger boats; all consumers are affected by the tax. Option B is incorrect because deadweight loss will occur regardless of whether some people still choose to purchase larger boats. Option C is incorrect because deadweight loss is not equal to the tax revenue plus the loss in consumer surplus; deadweight loss is only the loss in total surplus.

In the Absence of Taxes, Carlos Would Prefer to Purchase