Asked by Emily Gellis on Jun 17, 2024
Verified
The optimal tax is difficult to determine because although revenues rise and fall as the size of the tax increases, deadweight loss continues to increase.
Optimal Tax
A taxation principle aiming to maximize economic efficiency without imposing undue burdens or distortions.
Deadweight Loss
Economic efficiency loss occurring when free market equilibrium is not achieved for a good or service.
Revenues
The income generated from normal business operations and includes discounts and deductions for returned merchandise.
- Understand the connection among tax magnitude, tax income, and economic inefficiency.
Verified Answer
BR
BFDIA RocksJun 23, 2024
Final Answer :
True
Explanation :
As the size of the tax increases, it distorts market transactions more severely, leading to greater inefficiencies and a larger deadweight loss, even though tax revenues may initially rise and then eventually fall due to reduced economic activity.
Learning Objectives
- Understand the connection among tax magnitude, tax income, and economic inefficiency.