Most Taxes Distort Incentives and Move the Allocation of Resources

question 32

Multiple Choice

Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?

• A)Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol.
• B)Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders.
• C)Corrective taxes provide incentives for the conservation of natural resources.
• D)Corrective taxes do not affect deadweight loss.

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Definitions:

Tariff

A financial charge instituted by a government on goods exported from or imported into a country.

Absolute Advantage

The ability of a country, individual, or firm to produce a good or service at a lower cost per unit than other producers.

Trade Benefits

Advantages countries gain from engaging in international trade, such as increased economic growth, diversification, and access to new markets.

Comparative Advantage

An economic theory stating that countries or entities benefit from specializing in producing goods where they have lower opportunity costs, leading to more efficient global production.