Which term describes a loss of economic welfare that arises from a tax but provides no offsetting gain to taxpayers or the government?

• A. Deadweight loss
• B. Tax rate
• C. Inflation rate
• D. GDP

Answer: (A)

This question tests the idea of deadweight loss in taxation. When a tax is imposed, a wedge appears between what buyers pay and what sellers receive, causing the quantity traded to fall below the level that would be efficient in a tax-free market. The government collects tax revenue, but the overall loss in consumer and producer surplus—without a compensating gain elsewhere—creates an inefficiency. The result is a triangular area of welfare that's missing from the total surplus in the economy, known as deadweight loss. The size of this loss rises when buyers and sellers are more responsive to price changes (elasticities), since quantity falls more with a tax in those cases. Other terms, like the tax rate, inflation rate, or GDP, do not describe this specific welfare loss.