Which statement correctly describes the effect of a sales tax on smartphones on price, quantity demanded, and government revenue?

Which statement correctly describes the effect of a sales tax on smartphones on price, quantity demanded, and government revenue?

• A. A sales tax raises the price to buyers, reduces quantity demanded, and increases government revenue; the market experiences no deadweight loss.
• B. A sales tax lowers the price to buyers, reduces quantity demanded, and increases government revenue.
• C. A sales tax raises the price to buyers, increases quantity demanded, and reduces government revenue.
• D. A sales tax raises the price to buyers, reduces quantity demanded, increases government revenue, and may create deadweight loss.

Answer: (D)

A sales tax creates a price wedge between what buyers pay and what sellers receive. Because buyers face a higher price, the quantity of smartphones they demand falls from the level that would occur without the tax. The government collects revenue equal to the tax per unit times the number of smartphones sold, so government revenue increases. There is typically some deadweight loss because the higher price leads to fewer trades than would occur in a tax-free market, meaning welfare is lost on both the buyer and seller sides. The size of this loss depends on how sensitive buyers and sellers are to price changes; with more elastic responses, the deadweight loss is larger.

A sales tax creates a price wedge between what buyers pay and what sellers receive. Because buyers face a higher price, the quantity of smartphones they demand falls from the level that would occur without the tax. The government collects revenue equal to the tax per unit times the number of smartphones sold, so government revenue increases. There is typically some deadweight loss because the higher price leads to fewer trades than would occur in a tax-free market, meaning welfare is lost on both the buyer and seller sides. The size of this loss depends on how sensitive buyers and sellers are to price changes; with more elastic responses, the deadweight loss is larger.