Chapter 5 Government Interventions
We have so far focused on unimpeded markets, and we saw that markets may perform efficiently.The standard term for an unimpeded market is a free market, which is free in the sense of “free of external rules and constraints.” In this terminology, eBay is a free market, even though it charges for the use of the market. In this and subsequent chapters, we examine impediments to the efficiency of markets. Some of these impediments are imposed on otherwise efficiently functioning markets, as occurs with taxes. Others, such as monopoly or pollution, impede efficiency in some circumstances, and government may be used to mitigate the problems that arise.
This chapter analyzes taxes. There are a variety of types of taxes, such as income taxes, property taxes, ad valorem (percentage of value) taxes, and excise taxes (taxes on a specific good like cigarettes or gasoline). Here, we are primarily concerned with sales taxes, which are taxes on goods and services sold at retail. Our insights into sales taxes translate naturally into some other taxes.