In welfare economics, what is deadweight loss caused by an excise tax on a commodity?
Answer and explanation
Correct answer: B. The net loss of total consumer and producer surplus not captured by tax revenue
- Step 1: Deadweight loss is the reduction in total social welfare (consumer plus producer surplus) that results from an excise tax distorting market output below the socially optimal level. Answer: The net loss of total consumer and producer surplus not captured by tax revenue. Why not the others: Administrative costs are operational overhead, collected tax revenue is a transfer to government, and legal fines are punitive sanctions.
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