A tax on a good
A)gives buyers an incentive to buy less of the good than they otherwise would buy.
B)gives sellers an incentive to produce more of the good than they otherwise would produce.
C)creates a benefit to the government,the size of which exceeds the loss in surplus to buyers and sellers.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

A tax on a good increases the price paid by buyers, reducing the quantity demanded, giving them an incentive to buy less of the good than they otherwise would buy. Sellers, on the other hand, face a higher cost of production, reducing the quantity supplied, giving them an incentive to produce less of the good than they otherwise would produce. As a result, the tax reduces the size of the market, causing a deadweight loss, which represents a net loss of total surplus to buyers and sellers. The government may collect some revenue from the tax, but it is unlikely to fully compensate for the loss in surplus. Therefore, choice B and C are incorrect, and the best answer is A.

A Tax on a Good