A deadweight loss is a consequence of a tax on a good because the tax
A)induces the government to increase its expenditures.
B)induces buyers to consume less, and sellers to produce less, of the good.
C)causes a disequilibrium in the market.
D)imposes a loss on buyers that is greater than the loss to sellers.

Question

Quizplus · Accepted Answer

A deadweight loss is a loss of economic efficiency that occurs when the equilibrium quantity of a good is not produced or consumed due to a distortion in the market. A tax on a good typically leads to a decrease in demand and an increase in supply, resulting in a lower equilibrium quantity and higher equilibrium price. This reduction in the quantity traded causes a deadweight loss, as some mutually beneficial transactions are no longer occurring. Buyers consume less because of the higher price, and sellers produce less because of the extra cost of the tax, leading to a reduction in the overall welfare of society.

A Deadweight Loss Is a Consequence of a Tax on a Good