The inefficiency of a sales tax on a good is ultimately the result of the
A) low tax revenue earned by the government relative to the cost of collection.
B) wedge between what buyers pay for the good and what sellers receive for the good.
C) buyers being unable to avoid paying the tax.
D) sellers being unable to avoid paying the tax.
E) increase in the consumer surplus that is more than offset by the decrease in the producer surplus.

Question

Quizplus · Accepted Answer

A sales tax on a good creates a wedge between what buyers pay for the good (the price plus the tax) and what sellers receive for the good (the price minus the tax). This creates a deadweight loss or inefficiency in the market because some mutually beneficial transactions between buyers and sellers will no longer occur. This loss is greater the more elastic the demand and supply curves are, and can be expressed as the difference between the value that buyers and sellers place on the good before the tax is imposed and the value they place on it after the tax is imposed. The other choices are less relevant to the inefficiency of a sales tax.

The Inefficiency of a Sales Tax on a Good Is