Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The tax burden falls entirely on consumers, leading to a significant deadweight loss due to reduced consumption.
B
The tax burden is equally shared between consumers and producers, resulting in minimal deadweight loss.
C
The tax burden primarily affects producers, leading to a dramatic increase in deadweight loss as consumers continue purchasing.
D
The elasticity of demand being low means consumers bear most of the tax burden, which causes a larger deadweight loss than if demand were elastic.
Understanding the Answer
Let's break down why this is correct
Answer
When a government imposes a tax on sugary beverages, the price of these drinks goes up, which can lead to fewer people buying them. This change shows the concept of tax burden, where consumers end up paying more, while producers may receive less money for each drink sold. The significant drop in sales indicates that demand for sugary drinks is elastic, meaning people are sensitive to price changes and will buy much less if prices rise. As a result, the tax creates a deadweight loss, which is the loss of economic efficiency when the quantity of goods traded is reduced due to the tax. For example, if a sugary drink that used to sell for $1 now costs $1.
Detailed Explanation
When demand is not very flexible, consumers pay most of the tax. Other options are incorrect because This suggests only consumers pay the tax; This implies that consumers and producers share the tax equally.
Key Concepts
Tax Burden
Deadweight Loss
Elasticity of Demand
Topic
Tax Burden and Deadweight Loss
Difficulty
hard level question
Cognitive Level
understand
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