Conrad is worried. He has heard that the government is considering introducing a tax on paper. But who will end up paying it? Conrad and the other producers—or will they be able to pass the tax on to consumers? This chapter is mainly about taxation. Taxes are necessary to fund healthcare, education, and national defence, as well as to support those in need—such as families with young children, the unemployed, and pensioners. But tax policy is also highly contested. The political left and right disagree on how high taxes should be, what should be taxed, and how tax revenues should be used. One reason why taxation is so controversial is that it affects both the distribution of economic surplus and economic efficiency. Who bears the brunt of the tax—consumers or producers? Different political parties may prioritise the interests of one group over the other. And when a tax distorts an otherwise efficient market, it creates an economic cost—a deadweight loss—and people may disagree on how serious this is compared with other policy goals. Whatever your political views, it's important to understand the effects of economic policy on both efficiency and equity—and that’s what this chapter is all about. Some types of taxes, however, should be relatively uncontroversial. Think of pollution and the environment, as discussed in the previous chapter. Here, the market has a problem: a negative externality leads to deadweight loss. Against this backdrop, the environmental tax appears as the ideal remedy. It improves environmental outcomes, raises revenue for the government, and promotes economic efficiency—a win-win situation. Whether your political leanings are green, red, or blue, this kind of tax is simply good policy. Although we focus on taxation in this chapter, we also look at other types of government intervention—such as subsidies, trade policy, quotas, and price regulations. Subsidies can be used to encourage environmentally friendly behaviour. Import restrictions are often proposed to protect domestic industries. Price regulations appear in the labour market in the form of minimum wages, and as rent control in urban areas. Quantity regulations, such as quotas and licensing schemes, are common in markets where the authorities want to limit entry—whether for environmental reasons or to protect producers.