Question

Suppose the government taxes the rich to distribute money to the poor. which of the following is an example of an efficiency loss?

a. rich people take home less of the money from their jobs because of the tax
b. rich people don't work as hard because of the tax
c. poor people are better off because of the redistribution
d. both a and b e. none

Answer 1

An efficiency loss from taxing the rich for redistribution can occur when rich individuals reduce their work efforts, known as the poverty trap, as part of the tradeoff between economic output and equality.

Step-by-step explanation:

An example of an efficiency loss when the government taxes the rich to redistribute money to the poor would be rich people not working as hard because of the tax. This scenario points to a decrease in economic incentives, commonly referred to as the poverty trap. It is a situation where the guarantee of a certain level of income, due to redistribution, might reduce the incentive for the rich to work harder or for entrepreneurs to invest and take risks.

Furthermore, this reflects a possible tradeoff between economic output and equality. High levels of redistribution can lead to higher degrees of income equality but might also lead to a reduced economic output due to diminished incentives for production. Therefore, the correct answer is 'b. rich people don't work as hard because of the tax'.