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ALLOCATION EFFECT: The goal of imposing taxes to change the allocation of resources, that is, to discourage the production, consumption, or exchange or one type of good usually in favor of another. This is one of two reasons that governments impose taxes. The other reason is the revenue effect. Because people would rather not pay taxes, taxes create disincentives to produce, consume, and exchange. If society deems that less of a particular good, such as alcohol, pollution, or cigarettes are "bad," then a tax can reduce its production and consumption, and thus change the allocation of resources.

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Lesson 11: Circular Flow | Unit 3: Government Page: 11 of 22

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The government sector plays a key role in the economy and the circular flow with government spending, especially for the purchase of GDP, and taxes.
  • Government purchases include: national defense, roads, educational system, post offices, fire and police protection, parks, sewage treatment plants, and more.
  • Taxes are used to divert household sector income to the government sector to pay for these purchases.
  • The diversion of income into taxes used to purchase government production shows up in the circular flow model.

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INEFFICIENT

The state of resource allocation that exists when the highest level of consumer satisfaction is not achieved from available resources. This state occurs in market exchanges if the price buyers are willing and able to pay for a good does not reflect the satisfaction everyone obtains from the consuming the good or if the price sellers need to charge for a good does not reflect all opportunity cost of producing the good.

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BEIGE MUNDORTLE
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Today, you are likely to spend a great deal of time strolling around a discount warehouse buying club looking to buy either a rechargeable battery for your computer or shoe laces for your snow boots. Be on the lookout for telephone calls from long-lost relatives.
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Francis Bacon (1561-1626), a champion of the scientific method, died when he caught a severe cold while attempting to preserve a chicken by filling it with snow.
"In order to create there must be a dynamic force, and what force is more potent than love."

-- Igor Stravinsky, violinist

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