A tax on a good a. gives buyers an incentive to buy less of the good than they otherwise would buy. b. gives sellers an incentive to produce more of the good than they otherwise would produce. c. creates a benefit to the government, the size of which exceeds the loss in surplus to buyers and sellers. d. All of the above are correct.

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Business

Cunningham

16 March, 03:35

A tax on a good a. gives buyers an incentive to buy less of the good than they otherwise would buy. b. gives sellers an incentive to produce more of the good than they otherwise would produce. c. creates a benefit to the government, the size of which exceeds the loss in surplus to buyers and sellers. d. All of the above are correct.

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Kieran Hogan · Answer 1

Answer: Option (a) is correct.

Explanation:

Correct option: Gives buyers an incentive to buy less of the good than they otherwise would buy.

A tax on a good would result in lesser demand for the good. This tax on a good would lead to increase the price of the good.

So, there are two effects from this rise in price: substitution effect and income effect.

Because of rise in prices, the purchasing power of the consumer decreases as a result they demand less for the good. This is known as income effect.

On the other hand, this rise in price of one good would lead to increase the demand for its substitute goods. This is known as substitution effect.