Which of the following is an effect of imposing a tax on a good in a competitive market?

• A. It eliminates the difference between consumer and producer surplus.
• B. It creates a deadweight loss by reducing the quantity traded below the efficient level.
• C. It increases the equilibrium quantity to its maximum possible level.
• D. It causes the supply curve to shift to the right.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a tax in a competitive market. A tax on a good typically increases the cost of selling or buying that good, which affects the market equilibrium.
2. Step 2: Recall that consumer surplus is the difference between what consumers are willing to pay and what they actually pay, while producer surplus is the difference between the price producers receive and their cost of production.
3. Step 3: Recognize that imposing a tax usually causes the supply curve to shift vertically upward by the amount of the tax, or equivalently, it increases the price buyers pay and decreases the price sellers receive, reducing the quantity traded.
4. Step 4: Understand that this reduction in quantity traded below the efficient market equilibrium leads to a loss of total surplus, known as deadweight loss, because mutually beneficial trades no longer occur.
5. Step 5: Conclude that the correct effect of a tax is the creation of deadweight loss by reducing the quantity traded below the efficient level, rather than eliminating surplus differences, increasing quantity, or shifting supply to the right.