If you ever thought taxes were bad for the economy, here's one argument in your favor.

Today I bought a book for $17. I was willing to pay $20, so I had $3 in consumer surplus. The bookseller was willing to sell the book for $10, so he gained $7 in producer surplus. The total amount of surplus (consumer + producer) is called a social gain or welfare gain. This is why we, as humans, trade. Trade creates welfare gains to society. Both the consumer and the producer are better off when the book is sold; no one is worse off.

The problem with governmental interference (such as taxes) is that it changes incentives (of buyers and sellers) so they will not buy and sell the optimal amount of goods. For example, say that the tax on my book was $2. Then I pay $19 for it and have less consumer surplus ($1). (Depending on how the tax is structured either the consumer or the producer will suffer more from it, but either way there is less welfare gain.) But, if taxes go up to $4, then the book costs me $21 and I don't buy it at all because it is only worth $20 to me. No one benefits: not me, not the book seller, not even the government. These losses are known as dead-weight loss.

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