Multiple Choice
After the government imposes an excise tax on a market, what does the amount of deadweight loss represent?
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6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
Multiple Choice
When the government imposes a tax on a market, what happens to the total surplus?
A
Total surplus remains unchanged since taxes only transfer money.
B
Total surplus increases because the government collects tax revenue.
C
Total surplus decreases due to the creation of deadweight loss.
D
Total surplus increases as both consumer and producer surplus rise.
Verified step by step guidance1
Understand that total surplus in a market is the sum of consumer surplus, producer surplus, and any government revenue from taxes.
Recognize that when a tax is imposed, it creates a wedge between the price buyers pay and the price sellers receive, reducing the quantity traded in the market.
Identify that the reduction in quantity traded leads to a loss in both consumer and producer surplus because fewer mutually beneficial trades occur.
Note that while the government collects tax revenue, this revenue does not fully compensate for the loss in surplus experienced by consumers and producers.
Conclude that the net effect is a decrease in total surplus, which is known as deadweight loss, representing the inefficiency caused by the tax.
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