Which of the following definitions best describes a tax?

• A. A fee paid for the use of a private good or service.
• B. A price charged by firms for selling goods in a competitive market.
• C. A compulsory payment made by individuals and firms to the government, usually without a direct benefit in return.
• D. A voluntary donation to a charitable organization.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a tax in microeconomics: A tax is a compulsory payment imposed by the government on individuals or firms, typically without a direct exchange of goods or services in return.
2. Differentiate taxes from fees and prices: Fees are payments for specific services or goods, often private, where the payer receives a direct benefit; prices are amounts charged by firms in markets for goods or services.
3. Recognize that taxes are not voluntary: Unlike donations, taxes are mandatory and enforced by law.
4. Identify that taxes are used by governments to raise revenue for public goods and services, rather than as a payment for a private good or service.
5. Conclude that the best definition of a tax is a compulsory payment made by individuals and firms to the government, usually without a direct benefit in return.