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LAFFER CURVE: The graphical inverted-U relation between tax rates and total tax collections by government. Developed by economist Arthur Laffer, the Laffer curve formed a key theoretical foundation for supply-side economics of President Reagan during the 1980s. It is based on the notion that government collects zero revenue if the tax rate is 0% and if the tax rate is 100%. At a 100% tax rate no one has the incentive to work, produce, and earn income, so there is no income to tax. As such, the optimum tax rate, in which government revenue is maximized, lies somewhere between 0% and 100%. This generates a curve shaped like and inverted U, rising from zero to a peak, then falling back to zero. If the economy is operating to the right of the peak, then government revenue can be increased by decreasing the tax rate. This was used to justify supply-side economic policies during the Reagan Administration, especially the Economic Recovery Tax Act of 1981 (Kemp-Roth Act).
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ADVERSE SELECTION An inefficient, bad, or adverse outcome of a market exchange that results because buyers and/or sellers make decisions based on asymmetric information. This commonly results in a market that exchanges a lesser quality good, what is termed the market for lemons. Two related problems resulting from asymmetric information are moral hazard and the principal-agent problem. Two methods of lessoning the problem of adverse selection are signalling and screening.
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GRAY SKITTERY
[What's This?]
Today, you are likely to spend a great deal of time flipping through mail order catalogs hoping to buy either a birthday greeting card for your grandmother or a coffee cup commemorating yesterday. Be on the lookout for rusty deck screws.
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This isn't me! What am I?
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The portrait on the quarter is a more accurate likeness of George Washington than that on the dollar bill.
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"Courage is the ladder on which all the other virtues mount." -- Claire Boothe Luce, diplomat, writer
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JEH
Journal of Economic History
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