A tax causes no deadweight loss if: (a) demand is perfectly inelastic (b) supply is perfectly inelastic (c) there is no change in quantity following the imposition of the tax (d) all of the other answers*
Question
A tax causes no deadweight loss if: (a) demand is perfectly inelastic (b) supply is perfectly inelastic (c) there is no change in quantity following the imposition of the tax (d) all of the other answers*
Solution
A tax causes no deadweight loss in the following scenarios:
(a) Demand is perfectly inelastic: When demand is perfectly inelastic, consumers are willing to pay any price for a good or service. This means that even if a tax is imposed, the quantity demanded will not change. Therefore, there will be no deadweight loss, which is the loss of economic efficiency when the equilibrium for a good or a service is not achieved.
(b) Supply is perfectly inelastic: Similarly, when supply is perfectly inelastic, producers are willing to supply the same quantity of a good or service regardless of the price. So, even if a tax is imposed, the quantity supplied will not change, and there will be no deadweight loss.
(c) There is no change in quantity following the imposition of the tax: Deadweight loss occurs when the quantity of a good or service produced and consumed decreases due to a tax. If the quantity does not change after the tax is imposed, there will be no deadweight loss.
(d) All of the other answers: This option is correct as well, as it includes all the scenarios where a tax does not cause a deadweight loss.
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