When the government imposes an excise tax in a market with a downward-sloping demand curve and an upward-sloping supply curve:

Question

Quizplus · Accepted Answer

When an excise tax is imposed in a market with a downward-sloping demand curve and an upward-sloping supply curve, both consumer and producer surplus are affected. Consumer surplus falls because the tax increases the price that consumers pay, and producer surplus falls because the tax reduces the price that suppliers receive. Furthermore, there is a deadweight loss, which represents the loss of economic efficiency caused by the tax. This loss occurs because the tax reduces the quantity traded in the market, distorting the incentives of both buyers and sellers. Overall, the best choice is D because all of these effects occur when an excise tax is imposed.

When the Government Imposes an Excise Tax in a Market