=+15.7 Policy Application: Deadweight Loss from Subsidy of Mortgage Interest: The U.S. tax code subsidizes housing through a deduction of mortgage interest. For new homeowners, mortgage interest makes up the bulk of their housing payments, which tend to make up about 25% of a household’s income. Assume throughout that housing is a normal good.

A. For purposes of this problem, we will assume that all housing payments made by a household represent mortgage interest payments. If a household is in a 25% tax bracket, allowing the household to deduct mortgage interest on its taxes then is equivalent to reducing the price of $1 worth of housing consumption to $0.75.