Final answer:
Taxes cause deadweight losses because they create barriers that prevent both buyers and sellers from realizing all possible gains from trade, leading to economic inefficiency. Deadweight loss represents the loss of consumer and producer surplus, depicted as areas in a market model where supply and demand are not in equilibrium due to taxes.
Step-by-step explanation:
The correct statement among the options given is: taxes cause deadweight losses because they prevent both buyers and sellers from realizing some of the gains from trade. This occurs because taxes can lead to inefficiencies by interfering with the freely determined market prices and quantities. As mentioned, deadweight loss is the loss of social surplus, which includes both consumer and producer surplus, and happens when an economy produces at an inefficient output level. A deadweight loss is like money thrown away that doesn't benefit anyone and is depicted as area U + W in the provided figure. The presence of deadweight loss implies that both buyers and sellers are restricted from engaging in beneficial exchanges due to price control and other market distortions, such as taxes.
Government policies such as taxes are important for funding public services but can also result in unwanted side effects like economic inefficiency. Economists strive to craft tax systems that minimize these distortions and create a balance between different economic objectives.