A tax creates a deadweight loss when it:
Correct answer: B. Reduces mutually beneficial market transactions
- A. Raises government revenue from taxpayers
- B. Reduces mutually beneficial market transactions
- C. Transfers income between different groups
- D. Changes the legal incidence of taxation
Explanation
Deadweight loss is the loss of total economic surplus caused by transactions that no longer take place because of the tax. A transfer of income alone does not necessarily create deadweight loss, although the tax-induced reduction in trade does.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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