📚 Learning Guide
Graphing Deadweight Loss
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In a market affected by taxes, what is the primary reason for deadweight loss to occur?

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Learning Path

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Choose the Best Answer

A

It increases consumer surplus

B

It leads to inefficiencies in resource allocation

C

It raises government revenue

D

It decreases producer surplus

Understanding the Answer

Let's break down why this is correct

Answer

Deadweight loss occurs in a market affected by taxes because the tax changes the way buyers and sellers interact. When a tax is imposed, it raises the price buyers pay and lowers the price sellers receive, leading to fewer transactions. This means that some trades that would have happened without the tax no longer occur, which reduces overall economic efficiency. For example, if a tax is placed on a product, some consumers might decide not to buy it because it's too expensive, which hurts both the seller and the buyer. As a result, the total benefit to society is less than it could be without the tax, creating a loss that is not captured by the government or anyone else.

Detailed Explanation

Deadweight loss happens when taxes cause resources to be used less efficiently. Other options are incorrect because Some might think taxes increase consumer surplus, but they actually make goods more expensive; While taxes do raise money for the government, this isn't the main issue.

Key Concepts

economic welfare
market distortions
Topic

Graphing Deadweight Loss

Difficulty

medium level question

Cognitive Level

understand

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