15.4 Review and Practice Summary In this chapter we examined the role of the public sector in the market economy Since 1929, both the size and scope of government activities in the market have expanded considerably in the United States People demand government participation in three areas of economic activity First, people may want correction of market failure involving public goods, external costs and benefits, and inefficient allocation created by imperfect competition In each case of market failure, the shift from an inefficient allocation to an efficient one has the potential to eliminate or reduce deadweight losses Second, people may seek government intervention to expand consumption of merit goods and to reduce consumption of demerit goods Third, people often want government to participate in the transfer of income Programs to transfer income have grown dramatically in the United States within the past few decades The bulk of transfer payment spending is not means-tested Government activity is financed primarily by taxes Two principles of taxation are the ability-to-pay principle, which holds that tax payments should rise with income, and the benefits-received principle, which holds that tax payments should be based on the benefits each taxpayer receives Taxes may be regressive, proportional, or progressive The major types of taxes in the United States are income taxes, sales and excise taxes, and property taxes Economists seek to determine who bears the burden of a tax by examining its incidence Taxes may be borne by buyers or sellers, depending on the relative elasticities of demand and supply Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 835