Answer
(a) In the fifth year, the deadweight loss will be higher than in the first year.
b) In the first year, tax income will be higher than in the fifth year.
Work Step by Step
(a) After one year of the new tax, not many people will like to change their heating habits. Over time , consumers would switch to alternative forms of energy, which would change the market for fuel oil.
b) In the first year of the new tax, not many people will like to change their heating habits. As it is not possible for people to choose to change their heating habits, the market for heating oil is more inelastic. The tax income from heating oil is therefore relatively high.
As time goes by, more people will swap gas or electricity with heating oil. As a result, tax revenue will decline in year 5.
