Imagine the federal government is considering imposing a new tax on large SUVs. Assume, as shown in class, that the tax is physically collected from sellers.

a.What effect will this tax have on the equilibrium price and quantity in the market for large SUVs?

b.Show the impact of the tax on consumer surplus, producer surplus, tax revenue, and total private economic surplus. Label the deadweight loss associated with the tax.

c.How does the elasticity of demand for large SUVs affect the magnitude of the deadweight loss associated with the tax?

d.Given your answers to parts a-b, is there still an argument in favor of such a tax? Explain.