The art of taxation consist of so plucking the goose to obtain the greatest amount of feathers with the least amount of hissing.- Colbert, Finance Minister to Louis XIVLate 1700’s•“Distortional taxes”reduce efficiency.–Colbert recognized that we need taxes to fund public items like schools, roads, police, armies.–And that this has an effect on net economic surplus.Mankiw Principles:#3. Rational people think at the margin.#4 People respond to incentives.
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0.000.250.500.751.001.251.501.752.002.252.500255075100125Million kL per QuarterPrice $AU per kLMarginal (Private)CostMarginal BenefitMarginal Private Cost =Marginal Benefit(MPC=MB=0.75, Q=75)) No Externality(Mankiw #3: Rational people think at the margin)(AKA Supply= Demand)