Deadweight losses arise because a tax causes some individuals to change their behaviour.

Question

Quizplus · Accepted Answer

Deadweight losses occur because taxes alter the price that consumers pay and the price that suppliers receive, which creates a gap, called excess burden or deadweight loss. This gap or loss is due to the reduced economic activity that results from taxpayers or market participants changing their behavior, such as buying fewer goods or engaging in fewer profitable activities due to the tax. Therefore, deadweight loss is a result of tax distortions and changes in individual or market behavior.

Deadweight Losses Arise Because a Tax Causes Some Individuals to Change