📚 Learning Guide
Effects of Taxes and Subsidies
hard

When a tax is imposed on a good that is already underproduced, the result is that the good will be produced even less, leading to an increase in _____. This phenomenon occurs because the tax discourages production, moving the market further away from allocative efficiency.

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Choose the Best Answer

A

deadweight loss

B

consumer surplus

C

producer surplus

D

market equilibrium

Understanding the Answer

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Answer

When a tax is placed on a good that is already being produced in smaller amounts than needed, it causes the production of that good to decrease even more. This leads to an increase in the price of the good, making it even less affordable for consumers. For example, if a tax is added to organic vegetables, which are already not produced enough to meet demand, the higher price will deter more people from buying them. As a result, fewer organic vegetables are available, and this moves the market further away from allocative efficiency, where resources are used in the most beneficial way for society. In summary, the tax creates a situation where the good becomes scarcer and less accessible, worsening the problem of underproduction.

Detailed Explanation

Deadweight loss happens when a tax makes a good harder to produce. Other options are incorrect because Some might think that a tax helps consumers by funding services; It's easy to think that producers benefit from taxes.

Key Concepts

Effects of Taxes on Market Efficiency
Allocative Efficiency
Deadweight Loss
Topic

Effects of Taxes and Subsidies

Difficulty

hard level question

Cognitive Level

understand

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