In an effort to raise more tax revenue from the upper class, the government decides to impose a new tax on luxury goods like yachts, which increases the price of these goods by 50%. Which of the following is likely a secondary effect of this policy?

a. the laying off of hundreds of poor and middle-class yacht makers as the wealthy spend their money elsewhere.

b. An increase in the production of yachts by workers in the yacht industry

c. Increased profits by domestic yacht producers

d. There are no seondary effects, all carefully calculated government policies work out exactly as intended.

The correct answer is A. A secondary effect of an increase on yacht tax rates would be the laying off of hundreds of poor and middle-class yacht makers as the wealthy spend their money elsewhere.

Explanation:

The tax increase of a certain product necessarily increases the final price of that product, that is, when the tax rate is raised, the amount of money necessary to buy said good rises.

In turn, according to the law of demand, the higher the price, the lower the quantity demanded of the product. In other words, this tax increase would produce a drop in the demand for yachts.

If demand falls, the income of producers and sellers of the product falls. This is where production is affected, since small and medium producers will have greater difficulties to cope with the drop in sales, often incurring losses that would lead to having to close the business.