Question

Taxes a distort incentives and this distortion causes markets to allocate resources inefficiently. b do not distort incentives, but they do result in an inequitable allocation of resources. c distort incentives and this distortion results in an inequitable allocation of resources. d do not distort incentives, but they do cause markets to allocate resources inefficiently.

Answer 1

Answer:

Letter a is correct. Distort incentives and this distortion causes markets to allocate resources inefficiently.

Explanation:

What happens is that when rates rise, it causes an imbalance in supply and demand, because at higher rates companies are forced to raise prices to offset tax costs, so the pass-through of consumer prices discourages consumption and as a consequence of less consumption, production also decreases, causing the inefficient allocation of market resources.