High tax rates tend to:

• A. always increase government tax revenue without any negative effects
• B. increase the quantity of goods traded and reduce deadweight loss
• C. decrease the quantity of goods traded and increase deadweight loss
• D. have no effect on market efficiency or quantity traded

Answer: (C)

Verified step by step guidance

1. Understand the relationship between tax rates and tax revenue, which is often illustrated by the Laffer Curve. This curve shows that increasing tax rates initially increases revenue, but beyond a certain point, higher taxes discourage economic activity and reduce revenue.
2. Recall that a tax on a good creates a wedge between the price buyers pay and the price sellers receive, which reduces the quantity of goods traded in the market compared to the no-tax equilibrium.
3. Recognize that when the quantity traded decreases due to taxation, there is a loss of mutually beneficial trades between buyers and sellers, which is known as deadweight loss.
4. Analyze how higher tax rates typically increase deadweight loss because they cause a larger reduction in the quantity traded, making the market less efficient.
5. Conclude that high tax rates tend to decrease the quantity of goods traded and increase deadweight loss, which aligns with the correct answer choice.