Suppose people freely choose to spend 40 percent of their income on health care, but the government decides to tax 40 percent of a person’s income to provide the same level of coverage as before. What can be said about deadweight loss in each case?

Suppose people freely choose to spend 40 percent
of their income on health care, but the government decides to tax
40 percent of a person’s income to provide the same level of
coverage as before. What can be said about deadweight loss in each
case?

A.

Taxing income results in deadweight loss, while purchasing
health care on one’s own does not result in deadweight loss.

B.

Taxing income results in less deadweight loss, because
government knows better what health care coverage is good for
society.

C.

There is no difference because the goods are purchased in the
market in either case.

D.

There is no difference because the total spending remains the
same and the health care purchased remains the same.


 

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