Taxes cause deadweight losses because

Question

Quizplus · Accepted Answer

All three options are correct explanations for why taxes cause deadweight losses. A tax reduces the amount of trade that can occur between buyers and sellers, and that reduction results in a reduction in consumer and producer surplus, which can be larger than the amount of tax revenue collected. Additionally, taxes can cause some buyers and sellers to leave the market entirely, which reduces the quantity of goods or services sold overall. All of these factors contribute to deadweight losses associated with taxes.

Taxes Cause Deadweight Losses Because