An excise tax causes a loss in efficiency because taxes distort incentives.

Question

Quizplus · Accepted Answer

An excise tax increases the cost of production or consumption, which leads to a change in behavior of consumers and producers. Consumers will tend to buy less of the taxed good, while producers will tend to produce less of it. This leads to an inefficient allocation of resources and a deadweight loss to society. Additionally, the tax revenue collected by the government may not fully compensate for the loss in efficiency.

An Excise Tax Causes a Loss in Efficiency Because Taxes