Question

A deadweight loss results from the imposition of a tax on a good because the tax reduces the quantity of exchanges between buyers and sellers. True or False

Answer 1

This statement is true.

Step-by-step explanation:

The imposition of tax on a product creates a tax wedge between the price that the buyers pay and the price that the sellers receive. The tax burden is shared by both buyers and sellers, irrespective of whom the tax is imposed.

The price paid by the consumer's increases, while the price received by the sellers get reduced. This leads to a decline in both quantity demanded as well as quantity supplied.

The equilibrium quantity gets reduced. This also causes a loss of consumer surplus and producer surplus and thus creates a deadweight loss.