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A-Level Economics · Indirect tax diagram question

EVALUATION: Which unintended consequence could turn this tax into a GOVERNMENT FAILURE?

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The answer

Consumers switch to black-market suppliers who pay no tax — like the £2bn UK cigarette black market. Black-market trade means policing costs, lost revenue, worse product quality — if those costs outweigh the benefits, intervention made things worse: government failure. High taxed prices push buyers to untaxed illegal suppliers — the £2bn UK cigarette black market is the canonical case. If the costs (policing, lost revenue, dangerous products) exceed the benefits, the tax is a net welfare loss: government failure.

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This is one of 9 questions on the indirect tax diagram — every corner lettered, every wrong answer diagnosed.

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