Question

Suppose people freely choose to spend 40 percent of their income on health care, but then the government decides to tax 40 of a person's income to provide the same level of coverage as before. When can be said about deadweight loss in each case? a. Taxing income results in deadweight loss, and purchasing health care on one's own doesn't result in deadweight loss.b. Taxing income results in less deadweight loss because government knows better what health care coverage is good for society.c. There is no difference because the goods are purchased in the market in their case. d. There is no difference because the total spending remains the same and the health care purchased remains the same.

Answer 1

Answer:

A) Taxing income results in deadweight loss, and purchasing health care on one's own doesn't result in deadweight loss.

Explanation:

When you have a market in equilibrium and a new tax is set, this will always result in a deadweight loss. But individual's are free to spend their money in whatever legal good or service they need or want, so when they purchase health care by themselves there is no deadweight loss.