Taxes reduce the gains from trade, despite increasing consumer and producer surplus.
Taxes reduce the gains from trade, despite increasing consumer and producer surplus.
False
True
The statement is True.
Taxes can reduce the overall gains from trade because they create a wedge between the price consumers pay and the price producers receive. While taxes can lead to an increase in government revenue and may redistribute surplus between consumers and producers, they also create deadweight loss, which is the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. This deadweight loss means that the total surplus (the sum of consumer and producer surplus) is reduced, even if the individual surpluses may increase in some cases. Therefore, taxes can reduce the overall gains from trade.