How Does an Excise Tax Create a Cost to Society

Question

Examlex · Accepted Answer

The Answer is Answer
The tax drives a wedge between the price paid by consumers and the price received by producers.This wedge results in a decreased quantity of the good that is bought and sold.The difference between the untaxed equilibrium quantity and the new lower after-tax equilibrium quantity represents transactions that don't occur but that would have occurred without the tax.These lost transactions mean lost consumer and producer surplus, and this deadweight loss is the main cost of an excise tax.

How Does an Excise Tax Create a Cost to Society

Definitions: