πŸ“š Learning Guide
Tax Burden and Deadweight Loss
hard

Arrange the following steps in the correct order to understand the impact of a tax on market efficiency and the resulting deadweight loss: A) Tax is imposed on a good, B) Consumer prices increase and producer prices decrease, C) Market equilibrium is disrupted, D) Deadweight loss occurs due to reduced transactions.

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Learning Path
Learning Path

Question & Answer
1
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2
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3
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4
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Choose the Best Answer

A

A β†’ B β†’ C β†’ D

B

A β†’ C β†’ B β†’ D

C

B β†’ A β†’ D β†’ C

D

C β†’ A β†’ B β†’ D

Understanding the Answer

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Answer

To understand the impact of a tax on market efficiency and the resulting deadweight loss, we start with the imposition of a tax on a good, which is step A. Once the tax is in place, it affects prices, leading to an increase in consumer prices and a decrease in producer prices, which is step B. This change in prices disrupts the market equilibrium, as buyers and sellers adjust their behavior in response to the new prices, which is step C. As a result of these changes, fewer transactions occur in the market, leading to a deadweight loss, which is step D. For example, if a tax is added to soda, consumers might buy less soda because it is more expensive, and producers might sell less because they earn less, creating inefficiency in the market.

Detailed Explanation

First, a tax is added to a good. Other options are incorrect because This option suggests the market balance is disrupted before prices change; This choice puts prices before the tax is applied.

Key Concepts

Tax Burden
Deadweight Loss
Market Efficiency
Topic

Tax Burden and Deadweight Loss

Difficulty

hard level question

Cognitive Level

understand

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