Future Business Leader Achievments (FBLA) Economics Practice Exam

An efficient tax would meet which of the following criteria?

1. be progressive

2. utilize the benefit principle

3. be regressive

4. not interfere with resource allocation nor discourage production

The correct answer is: not interfere with resource allocation nor discourage production

An efficient tax system is one that minimally distorts economic decisions and resource allocation. Therefore, the criteria that a tax should not interfere with resource allocation nor discourage production speaks directly to the concept of economic efficiency. When a tax system is efficient, it allows markets to function properly without creating significant deadweight loss, which occurs when the tax discourages mutually beneficial transactions between buyers and sellers. By not interfering with resource allocation, the tax enables the economy to allocate resources effectively based on supply and demand rather than being skewed by taxation. This supports continued production and employment, fostering a more robust economy. The other options, while they may have their merits in different contexts, do not meet the criteria of efficiency in the same way. For instance, a progressive tax is designed to impose a higher rate on higher income earners, aiming for equity rather than efficiency. Utilizing the benefit principle focuses on the fairness of tax burdens based on the benefits received, which may or may not lead to an efficient allocation of resources. A regressive tax, on the other hand, disproportionately affects lower-income individuals, potentially leading to greater inequities without addressing the efficiency concern. Therefore, the proper alignment with economic efficiency is best captured by the proposition that a tax should not interfere with