During the 1980s, the U.S. Congress imposed a high sales tax on yachts, figuring that the rich could afford to pay for this luxury. But so many jobs were lost in the boat-building industry that the measure was finally repealed. What did Congress get wrong in imposing this tax? Briefly discuss.

Congress failed to consider both derived demand and elasticity of demand when they raised the taxes on yachts. The demand for these boats is highly elastic, which means that it is not a necessary item, and people can easily choose not to buy. When the demand for yachts declined, the demand for the parts to make the boats declined also. The loss of those jobs affected the ordinary working people who made the parts, not the wealthy folks who bought the yachts.