Imagine that the U.S. Congress, recognizing the importance of being well dressed, started giving preferential tax treatment to “clothing insurance.”

Under this new type of insurance, you would pay the insurance company an annual premium, the insurance company would then pay for 80 percent of your clothing expenses

(you pay the remaining 20 percent), and the tax laws would partly subsidize your insurance premiums.

a. How would the existence of such insurance affect the amount of clothing that people buy? How would you evaluate this change in behavior from the standpoint of economic efficiency?

b. Who would choose to buy clothing insurance?

c. Suppose that the average person now spends

$2,000 a year on clothes. Would clothing insurance cost more or less than $2,000?

Explain.

d. In your view, is this congressional action a good idea? How would you compare this idea with the current tax treatment of health insurance?