If a $2 tax on cigarettes decreases both consumer and producer surplus:
A) tax revenues will exactly equal the amount of the lost consumer and producer surplus.
B) tax revenues will be less than the amount of the lost consumer and producer surplus.
C) tax revenues will be more than the amount of the lost consumer and producer surplus.
D) there will be no deadweight loss.

Question

Quizplus · Accepted Answer

Tax revenues are less than the lost surplus because the tax creates a deadweight loss, which is the loss of economic efficiency when the equilibrium outcome is not achieved.

If a $2 Tax on Cigarettes Decreases Both Consumer and Producer