When taxes are imposed on a commodity,
A)there is never a deadweight loss.
B)some consumers alter their consumption by not purchasing the taxed commodity.
C)tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.
D)the taxes do not distort incentives.

Question

Quizplus · Accepted Answer

When taxes are imposed on a commodity, some consumers alter their consumption by not purchasing the taxed commodity. This is known as the price elasticity of demand. As a result, there is a decrease in the quantity demanded which leads to a decrease in consumer surplus and seller surplus. This decrease is known as deadweight loss. Therefore, option A is false. Tax revenue will not rise by the amount of tax multiplied by the before-tax level of consumption as the decrease in the quantity demanded will lead to a decrease in tax revenue. Thus, option C is also false. Lastly, taxes do distort incentives as they alter the relative prices, making some goods relatively more expensive than others. This results in changes in consumer and producer behavior which affects the allocation of resources. Therefore, option D is false.

When Taxes Are Imposed on a Commodity