A tax on a good

Question

A tax on a good

Quizplus · Accepted Answer

A tax on a good raises the production cost for sellers and reduces their profit margins. This creates a disincentive for sellers to produce the good, leading to a decrease in supply. As a result, the equilibrium price of the good rises, and buyers have to pay more to purchase it. This reduces the quantity demanded, as buyers may switch to alternative products or reduce their overall consumption. Therefore, a tax on a good reduces both consumer surplus and producer surplus, and the burden falls on both buyers and sellers. However, buyers still have an incentive to buy less of the good, not more, because its price has risen. Option A is incorrect. Option C is also incorrect because the government's revenue from the tax is only a fraction of the surplus loss suffered by buyers and sellers, and it depends on the size and structure of the market.

A Tax on a Good