A tax wedge creates a gap between the price consumers pay and the price producers receive, leading to consumer prices separating from producer prices. This is because the tax is levied on the producer, who may then raise their prices to maintain profits, leading to a higher price for the consumer.

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A Tax Wedge Causes

Question 18

Multiple Choice

A tax wedge causes

A) consumer prices to equal producer prices.
B) producer prices to rise above consumer prices.
C) consumer prices to separate from producer prices.
D) all prices to fall.

Correct Answer: