1. Suppose that Texas has a state vehicle registration tax, and that there are two types of drivers in the state: teenagers (T) and adults (A). For each group, the annual demand for registering vehicles is:

Teenagers: P = 400 100QT Adults: P = 700 50QA

where P is dollars, and Q is millions of vehicles. The marginal cost to the state of registering a vehicle is $10. But to raise money, the state currently charges $300 per vehicle per year.

a) What is total social surplus under the current fee of $300 per vehicle per year?

b) What is the deadweight loss from the $300 tax, compared to a fee equal to the marginal cost of registering ($10/year)?

c) Suppose the Texas legislature decides to increase the vehicle registration tax to raise additional revenue for road maintenance. One legislator with a Masters degree from the LBJ School proposes increasing the tax more for adults than for teenagers, claiming this would be more efficient than raising the tax equally for both groups. Is she correct? If so, why? If not, why not?