Why do taxes adversely affect the allocation of resources in society?
A) because they do not always fall more heavily on the rich
B) because the taxes collected are not enough to finance government spending
C) because not everyone pays taxes
D) because they distort prices and thus the decisions of households and firms

Question

Quizplus · Accepted Answer

Taxes distort prices by increasing the cost of goods and services, which can cause households and firms to alter their consumption and production decisions. For example, if the government places a tax on gas, individuals may decide to drive less or purchase more fuel-efficient cars. Firms may also shift production to goods that are not as heavily taxed. These decisions can lead to an inefficient allocation of resources in society.

Why Do Taxes Adversely Affect the Allocation of Resources in Society