If the government imposes a tax on a competitive market with no externalities, then i. resource use is not efficient.
Ii. there is a deadweight loss.
Iii. consumer surplus is at its maximum.

Question

Quizplus · Accepted Answer

A tax on a competitive market with no externalities creates a deadweight loss, which means that resource use is not efficient. The tax increases the price of the product, causing a decrease in consumer surplus. The decrease in consumer surplus and producer surplus leads to a deadweight loss, which is the loss of economic efficiency that occurs when the tax is imposed. Therefore, both i and ii options are correct. However, option iii is incorrect as the tax reduces the consumer surplus, so it cannot be at its maximum.

If the Government Imposes a Tax on a Competitive Market