Modem society cannot exist without some form of taxation. We all expect the government to provide us with certain services, such as roads, parks, police, and national defense. These public services require tax revenue. This chapter has used the tools developed in the previous chapter to further our understanding of taxes. One of the ten Principles of Economics discussed in Chapter 1 is that markets are usually a good way to organize economic activity. In Chapter 7, we used the concepts of producer and consumer surplus to make this principle more precise. Here we have seen that when the government imposes taxes on buyers or sellers of a good, society loses some of the benefits of market efficiency. Taxes are costly to market participants not only because taxes transfer resources from those participants to the government but also because they alter incentives and distort market outcomes.
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