Question

Why is a tax inefficient?

A tax is inefficient because _______.

A.the marginal social benefit from the last unit sold exceeds the marginal social cost of the last unit produced and a deadweight loss is created

B.it decreases consumer surplus but increases producer surplus

C.the burden of the tax is not always split equally between buyers and sellers

D.with a tax, the market produces more than the equilibrium quantity

Answer 1

Option

A.the marginal social benefit from the last unit sold exceeds the marginal social cost of the last unit produced and a deadweight loss is created

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Tax is inefficient because

Per unit tax =after tax consumer pay - after-tax producer receives

after-tax consumer pay=marginal social benefit

after-tax producer receives=marginal social cost

so MSB>MSC at the output level after-tax and efficient level of output is at MSB=MSC

the inefficient level of output also creates a deadweight loss in the market.