When a tax is levied on a good,
A)government collects revenues which might justify the loss in total welfare.
B)there is a decrease in the quantity of the good bought and sold in the market.
C)a wedge is placed between the price buyers pay and the price sellers effectively receive.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

When a tax is levied on a good, it leads to a decrease in the quantity of the good that is bought and sold in the market (Choice B). This is due to the fact that the tax increases the total cost of the good, making it more expensive for consumers to buy and less profitable for sellers to produce. Additionally, the tax creates a price wedge between the price buyers pay and the price sellers effectively receive (Choice C). The tax revenue collected by the government may justify the loss in total welfare, depending on how the revenue is used, and may lead to benefits for society as a whole (Choice A). Therefore, all the given choices are correct.

When a Tax Is Levied on a Good