Question

How can taxes cause losses in efficiency in competitive markets?

Answer 1

Higher taxes reduce the profitability for the businesses which results in fewer benefits for the efforts made by the companies to improve their business and contribute to the economic growth. Moreover, taxes results in higher prices of goods which results in welfare loss and also loss of consumer surplus.

So at the end both producer as well as consumer surplus reduces because of taxes which results in less efforts on improving business and work efficiency , so it cause losses in efficiency in competitive markets.

the above is the answer