The dead weight loss of a tax is a result of
A)the resulting excess demand
B)marginal cost being greater than marginal benefit
C)marginal cost being greater than average cost
D)marginal benefit being greater than marginal cost

Question

Quizplus · Accepted Answer

The deadweight loss of a tax is a measure of the efficiency loss caused by the tax. It arises when the marginal benefit of the good or service is greater than its marginal cost, but the tax leads to reduction in quantity demanded and production. Therefore, the optimal level of consumption and production is not achieved, resulting in a welfare loss. This situation is caused by the imposition of a tax, hence the best choice is D, where the marginal benefit is greater than the marginal cost.

The Dead Weight Loss of a Tax Is a Result