Taxes

Question

Taxes

Quizplus · Accepted Answer

Taxes distort incentives by changing the relative prices of goods and services, leading to a shift in consumption, production, and investment decisions. This ultimately causes markets to allocate resources inefficiently because individuals and firms may not make choices that truly reflect their preferences and production costs. For example, a tax on carbon emissions will make fossil fuel-based energy sources relatively more expensive, which can reduce their use, but also causes consumers to shift to other renewable energy sources that may be less efficient or effective.