Question

Taxes cause deadweight losses because a. taxes reduce the sum of producer and consumer surpluses by more than the amount of tax revenue. b. taxes prevent buyers and sellers from realizing some of the gains from trade. c. taxes cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall. d. All of the above are correct.

Answer 1

Answer:

The correct answer is b.  taxes prevent buyers and sellers from realizing some of the gains from trade.

Explanation:

If the taxes on a good apply to the buyers or sellers of that good, the result is the same. When buyers pay the tax, the demand curve shifts down in the same proportion as the amount of the tax; When sellers pay the tax, the supply curve moves up by an amount equal to the amount of the tax. In both cases, when the tax is established, the price paid by the buyers increases and the price received by the sellers decreases. In the end, the elasticities of supply and demand determine how the tax burden is distributed between producers and consumers. The distribution is the same regardless of who pays the tax.