A distorting tax can improve economic welfare when other taxes that already distort decisions are present.

Question

Quizplus · Accepted Answer

A distorting tax can improve economic welfare under certain conditions, such as when it is used to correct for the inefficiencies or distortions caused by other taxes. This concept is related to the theory of second-best, where in the presence of existing distortions, introducing another distortion (such as a tax) can sometimes lead to a more efficient outcome by counteracting the effects of the first distortion.

A Distorting Tax Can Improve Economic Welfare When Other Taxes