A government increases the tax on imported luxury cars from 25% to 40%. This policy is most likely to
Question 1 Report
A government increases the tax on imported luxury cars from 25% to 40%. This policy is most likely to
Answer Details
The correct answer is increase government tax revenue from luxury car imports.
Raising the import tariff from 25% to 40% means each imported luxury car now attracts a higher rate of tax. Even though the higher price may reduce the quantity of luxury cars imported to some extent, luxury cars tend to have relatively price-inelastic demand because they are status goods with few close substitutes. The percentage fall in quantity demanded is likely to be smaller than the percentage rise in the tariff rate, so total tax revenue from these imports increases.
The policy would not reduce the price of domestic cars; if anything, reduced import competition could allow domestic prices to remain higher. It would not increase the quantity of imported luxury cars sold, since the higher tariff raises their price. It would not reduce the demand for domestic cars; consumers may switch toward domestic alternatives.
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