There is currently a sales tax on all cars, foreign and domestic. In order to help the American car industry, the government is thinking of eliminating the sales tax.
Plan A is to eliminate the tax for domestic cars only; Plan B is to eliminate the tax for both domestic and foreign cars.
a. Which plan is better for domestic car makers?
b. True or False: Plan B, combined with an appropriate redistribution of income, can make everybody happier than Plan A. If your answer is true, explicitly describe the appropriate redistribution of income. If your answer is false, explain carefully why no such redistribution is possible.