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PARETO OPTIMALITY

This is a very widely used concept. But it is used only theoretically. It is also called as Pareto efficiency. It can be better explained with the help of the economic efficiency and the value it has. It could be either normative or positive in nature. This is done in order to bring satisfaction even if it is to the minimum possible extent.

If the government has to carry on with the various activities that it has to, then it must have resources too. The way to obtain resources in case of the government will be a little complicated. This is so because the private sector will have economic efficiency changes and also changes in the distribution in the income level. This will happen when the government is collecting money from the private sector.

The example of taxation:

When there is a collection of taxes that is a price one party, then it will see a change in the transactions. It would see a different price from that of the other parties. This way there can be economic inefficiency and can lead to market failure. The taxations have an ability to change the incentives that are given to the people. This is the main reason as to how the economic efficiency is changing. Though the politicians may or may not understand the effects of taxes, the economists are fascinated with it. Let us see the efficiency implications in case of the excise tax.

It is something that is put on a specific item. To make it simple, it is sales tax. It can be of two types. It can be a tax per unit or it can be an ad valorem tax. In the case of the per unit tax, it is fixed and in the second case, it is generally a percentage of the value of the good. Though they are a minor source of income to the government in most cases, they do help the government.

The taxation has an ability to change the incentives that are given to the people. This is the main reason as to how the economic efficiency is changing. Though the politicians may or may not understand the effects of taxes, the economists are fascinated with it. Let us see the efficiency implications in case of the excise tax.

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