What is the most direct economic effect of a tax that creates a wedge between the price paid by buyers and the price received by sellers?
Correct answer: A. A reduction in mutually beneficial transactions
- A. A reduction in mutually beneficial transactions
- B. An equal rise in total production
- C. A permanent fall in public revenue
- D. An automatic increase in market competition
Explanation
The tax raises the buyer's price and lowers the seller's net price, reducing the quantity traded. The lost gains from trades that no longer occur are called deadweight loss.
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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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