Suppose that in an effort to reduce the deficit, it is decided that some luxuries should be heavily taxed. Suppose that you are asked to recommend one of two taxes: a 50% tax on the sale of old master paintings, or a 50% tax on yachts. Given that your goal is to minimize the dead weightloss, which of these two markets would you tax, and why? (Hint: Compare the demand and supply conditions.)

When assessing the welfare effects of taxes, we can conclude that They are always welfare increasing, because they allow the government to provide essential goods They are usually welfare decreasing in the market in which they are raised, but for society as a whole it depends on how they are used They are always welfare decreasing They are welfare neutral, because whatever is lost by producers and consumers goes instead to the government and therefore is just a reallocation of money

The Nobel prize winning economist Milton Friedman liked to tell this story:   There once was a town where thanks to expansive fiscal policy in Washington, the town had more money to fix roads and build bridges. The construction workers on those projects splurged on steak dinners every Friday, the meat for which they bought at the local butcher shop. The butcher was thrilled by increased sales of meat, as was the butcher's wholesale supplier. In fact, the butcher's supplier tried to put in bigger orders but it wasn't possible to buy more because the slaughterhouses were caught short, too. The result? Higher prices for meat got passed up from the slaughterhouse to the wholesaler to the butcher to the construction workers. With the possible exception of the owners of cattle, nobody was happy. Now a news reporter heard about surging steak prices in the town and decided to write a story about what was happening. Since the initial increase in meat prices was seen in the price of meat sold by…

Some economists argue for the use of fiscal policy to solveeconomic problems; others argue against it. What are someof the arguments on both sides?