The amount of deadweight loss that results from a tax of a given size is determined by
A)whether the tax is levied on buyers or sellers.
B)the number of buyers in the market relative to the number of sellers.
C)the price elasticities of demand and supply.
D)the ratio of the tax per unit to the effective price received by sellers.

Question

Quizplus · Accepted Answer

The amount of deadweight loss resulting from a tax of a given size is determined by the price elasticities of demand and supply. This is because price elasticity measures how responsive buyers and sellers are to changes in prices. The more elastic the demand and supply are, the larger the deadweight loss resulting from a tax. This is because, in the presence of a tax, buyers and sellers change their behavior to a greater extent, resulting in a greater reduction in market efficiency and economic welfare. Therefore, option C is the best choice.

The Amount of Deadweight Loss That Results from a Tax