Question

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 principleB. Horizontal equityC. Substitution effectD. Vertical equityE. None of these

Answer 1

Answer:

C. Substitution effect

Explanation:

The substitution effect is the change a consumer makes from one good to another when either of them changes in price. The relationship happens with the so-called substitute goods. These goods have similarities with each other, “competing” in some way for consumer preference. That is, when a good becomes more expensive, the consumer may consider that it is no longer worth buying it. Therefore, it migrates its consumption to a cheaper substitute good. Based on this concept, we can conclude that the substitution effect explains why the idea of Al may not work.