Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They reduce production further, increasing deadweight loss.
B
They encourage production, leading to better market efficiency.
C
They have no impact on production levels or efficiency.
D
They help eliminate negative externalities associated with the good.
Understanding the Answer
Let's break down why this is correct
Answer
When a tax is placed on a good that is already being produced in smaller amounts than what is needed, it can make the situation even worse. This is because the tax raises the price of the good, which discourages people from buying it. As a result, fewer people get to enjoy that good, and the producers might cut back even more on how much they make, leading to inefficiency in the market. For example, if a tax is placed on organic apples, which are already less available than regular apples, the higher price may cause even fewer people to buy them and farmers to grow less, reducing overall satisfaction. This creates a situation where the market fails to provide enough of a good that people want, leading to a loss of economic efficiency.
Detailed Explanation
Taxes on a good that is already not made enough make it even less appealing to produce. Other options are incorrect because Some might think taxes encourage more production, but they actually make it harder for businesses to produce; It's a common belief that taxes don't change anything, but they really do affect how much is produced.
Key Concepts
Impact of Taxes
Market Efficiency
Deadweight Loss
Topic
Effects of Taxes and Subsidies
Difficulty
medium level question
Cognitive Level
understand
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