Why do taxes create deadweight losses
A)They reduce profits of firms.
B)They distort incentives.
C)They cause prices to rise.
D)They create revenue for the government.

Question

Quizplus · Accepted Answer

Taxes distort incentives because they change the relative prices of goods and services, causing people to alter their behavior in ways that are not efficient. This, in turn, leads to a loss of economic welfare or deadweight loss. Taxes do not necessarily reduce profits, cause prices to rise, or create revenue for the government.

Why Do Taxes Create Deadweight Losses