Question

Suppose the state of Florida passes a law that increases the tax on alcoholic beverages. As a result, resi-dents in Florida start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate?

Answer 1

Answer:

Residents (people's) reaction to Incentives

Explanation:

An incentive represents something, an action or a law that causes people to act or change their behaviour about something at a particular time. Basically, incentives work by making rewards available to individuals who change their behaviour on a targeted issue.

Usually, since people rationally compare the costs and benefits of their actions, incentives gives them the opportunity to raise their perception of this costs and benefits and also induces them to respond.

Florida increases the tax on alcoholic beverages, the people still see the benefits of taking alcohol but not at the increased, the reaction therefore, is to purchase in surrounding states where they are still cheaper without a tax increase.

It should be noted from the Florida example that the reaction of people to incentives can both be negative and positive. This example shows a negative response as a result of raised costs when compared with benefits.