W3: Discussion Question 1 subscribe Taxes and Dead-Weight Loss Answer one of the

Question

W3: Discussion Question 1 subscribe Taxes and Dead-Weight Loss Answer one of the two prompts below. During the 1990s, the U.S. Congress imposed a high sales tax on yachts, figuring that the rich could afford to pay for this luxury. But so many jobs were lost in the boat-building industry that the measure was finally repealed. What did Congress get wrong in imposing this luxury tax? In terms of elasticity are yachts highly elastic or inelastic? This tax was repealed within a few months, if congress had left the tax in place would the sale of yachts rebounded? Why or why not? Does elasticity in the long term? OR

Explanation / Answer

Congress assumed that the demand for yachts was relatively inelastic and that supply was elastic. If this were true, yacht sales would not fall much as result of the tax. However ,if both demand and supply are elastic the yacht sales drop dramatically- leading to cutbacks in production and lost jobs. Now if tax was repealed within a few months, taxes do not always have as big an effect on consumer behavior as we may expect. But in the short run, the tax withdrawl won't rise the sale of yachts drmatically, as the demand and supply will be partially inelastic. But in the long run the sale of yachts will be back at its equilibrium, as LRAS will be perfectly elastic.

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