An article in a Federal Reserve publication noted that “nearly all taxes create some market inefficiency in the form of deadweight loss.” The article further noted that when something is taxed, the result is “an outcome in which both [buyers and sellers] would gain from more production.”
a. Briefly explain why taxes result in deadweight loss.
b. If buyers and sellers would gain from more production of a good or service that is taxed, why doesn’t more of the good or service get produced?”