David Smith- 'Free Lunch' (Pt. II- On markets and taxes)

In the ‘Main Course’ of the book, Smith really begins to get into what makes consumers consume, and producers produce- this is talk of incentives in the Free Market system. Here, some of the key points about utility and how that affects our choices are made, with reference to the likes of Paul Krugman and Steven Landsburg and their thoughts on the subjects surrounding this topic. Smith also, briefly references indifference- which can be graphed and used in tandem with opportunity cost curves as a means of extension of the topic. He goes on to write of how utility and indifference culminate and allow for incentives to be used in the marketplace to correct a market failure. He quotes Landsburg on a reason for why low-fat foods can actually make people fatter:

“A scoop of ice cream a night would add 10 pounds to your weight, and you've

 decided that’s not worth it, so you don’t eat ice cream. Now along comes low-fat ice-cream that allows you to eat two scoops a night and add 10 pounds to your weight. That’s a better deal, and a perfectly rational being might well opt for it. So, when low-fat foods come along, some people sensibly become fatter.”

Smith, in the end of this chapter, finishes by briefly touching on the work of Arthur Laffer who theorised the ‘Laffer curve’ (see right) which shows how effective taxes are at different rates, and why having 100% or 0% income tax would be equally as useless, neither bringing in tax revenue- although not explicitly, as he goes into further detail on this a little later.

Hey guys, if you have any questions about anything that I've said, feel free to leave me them in the comments section!

K