📚 Learning Guide
Taxation and Deadweight Loss
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How does a per-unit tax on a good affect consumer surplus and deadweight loss in a market?

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Choose the Best Answer

A

It increases both consumer surplus and deadweight loss.

B

It decreases consumer surplus and increases deadweight loss.

C

It has no effect on consumer surplus or deadweight loss.

D

It increases consumer surplus and decreases deadweight loss.

Understanding the Answer

Let's break down why this is correct

Answer

A per-unit tax on a good means that the government charges a specific amount for each unit sold, which usually raises the price for consumers. When the price goes up, some consumers may decide not to buy the product at all, leading to a decrease in the overall satisfaction or consumer surplus they receive from buying it. This reduction in purchasing can also create a deadweight loss, which is the loss of economic efficiency that occurs when the quantity of a good traded in the market decreases. For example, if a new tax is placed on soda, fewer people might buy soda because it costs more, resulting in less enjoyment for those who would have bought it at a lower price. Overall, the tax creates a gap between what consumers are willing to pay and what they actually pay, leading to both a loss in consumer surplus and deadweight loss in the market.

Detailed Explanation

A per-unit tax raises the price for consumers. Other options are incorrect because This option suggests that both consumer surplus and deadweight loss increase; This option claims that a tax has no effect.

Key Concepts

Consumer Surplus
Types of Taxes
Topic

Taxation and Deadweight Loss

Difficulty

medium level question

Cognitive Level

understand

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