In an otherwise efficient market,an excise tax causes ________ because it distorts the relationship between ________.

Question

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An excise tax causes allocative inefficiency because it distorts the relationship between prices and marginal costs. The tax increases the production cost of the good or service, which leads to a higher price for consumers, causing a reduction in demand. As a result, the quantity produced and consumed will be less than the socially efficient level, leading to allocative inefficiency.

In an Otherwise Efficient Market,an Excise Tax Causes ________ Because