The deadweight loss of a tax is
A)the reduction in economic welfare of taxpayers that exceeds the revenue raised by the government.
B)the improved efficiency created as people reallocate resources according to the tax incentive rather than the true costs and benefits.
C)the loss in tax revenues.
D)Both a and b are correct.

Question

Quizplus · Accepted Answer

The deadweight loss of a tax refers to the reduction in economic welfare that exceeds the revenue raised by the government. This occurs when a tax creates inefficiencies in the market by altering the behavior of buyers and sellers, resulting in reduced economic activity and a loss of potential gains from trade. A deadweight loss is a type of inefficiency that arises due to market distortions caused by taxes or other external factors. Therefore, option A is the best choice.

The Deadweight Loss of a Tax Is