Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)

For example, both a gasoline tax and an income tax generate revenue. Yet they create profoundly different incentives. The income tax will discourage some people from working, which is a bad thing. The gasoline tax will discourage some people from driving, which can be a good thing. Indeed, “green taxes” collect revenue by taxing activities that are

One powerful feature of a market economy is that it directs resources to their most productive use.

the Laffer curve, which provided the intellectual underpinnings for the large Reagan-era tax cuts.

If we fix prices in a market system, private firms will find some other way to compete.

The real cost of something is what you must give up in order to get it, which is almost always more than just cash.

By 1991, the Hindustan Fertilizer Corporation had been up and running for twelve years.3 Every day, twelve hundred employees reported to work with the avowed goal of producing fertilizer. There was just one small complication: The plant had never actually produced any salable fertilizer. None. Government bureaucrats ran the plant using public funds

Good policy uses incentives to channel behavior toward some desired outcome. Bad policy either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized.

Consider the following question posed by Amartya Sen, winner of the 1998 Nobel Prize in Economics.13 Three men have come to you looking for work. You have only one job to offer; the work cannot be divided among the three of them and they are all equally qualified. One of your goals is to make the world a better place by hiring the man who needs the

Economics starts with one very important assumption: Individuals act to make themselves as well off as possible.