Efficiency vs. Equality

The Lucas critique, named for Robert Lucas¿ work on macroeconomic policymaking, argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.

There is a very nice example. In 1992 the German government tried to increase their tax revenue by increasing the tax on cigarettes.

The effect was that 1) people bought less cigarettes and 2) the tobacco industry developed a new kind of cigarette which wasn’t affected by this tax increase.

Finally, the tax revenues decreased.