Each year, millions of people drive without auto insurance, despite a law requir
ID: 1208099 • Letter: E
Question
Each year, millions of people drive without auto insurance, despite a law requiring that all drivers carry such insurance. Knowing this, law-abiding drivers might also choose to carry extra coverage to protect themselves in case they are hit by an uninsured motorist. This essentially penalizes drivers who obey the law, and many view it as unfair.
Suppose that someone proposes a gasoline tax of $2 per gallon to help pay for publicly provided automobile insurance. The graph below shows the demand and supply curves of the market for gasoline as well as the wedge that the tax creates. Use the graph to answer the following questions.
The amount of deadweight loss to society if the tax is put into effect is shown by: A. Areas A and B B. Areas A and C C. Areas A, B, C, and D D. Areas B and C E. Areas B and DExplanation / Answer
Answer: The amount of deadweight loss to society if the tax is put into effect is shown by E. Areas B and D
Reason: A deadweight loss is also known as excess burden which occurs when demand is not equal to supply or equlibrium is not acheived. The excess burden of taxation is the loss of the utility to the consumer. In this question the dead weight loss area is the triangle formed in the Areas B and D
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