So, I was reading through an article from the journal of economic education entitled, "Textbooks, Taxes, and Objectivity in Economics Instruction" (always gotta love that word "objectivity" when talking about teaching economics). They present the standard textbook argument that taxes lower social welfare by creating some deadweight loss -- the standard argument of course, where the loss in consumer surplus is greater than the gain in profits. The author then laments that this is usually as far as textbooks take the argument in terms of the chain of logical reasoning.
And then, oh boy, I get to this quote:
If the textbook discussion... concludes at this point in the example, the student will be left with the impression that the public sector is necessarily a burden on society. A discussion of the benefits of tax-financed public expenditure will give the student a more balanced view.... Before the city council exercised its power to tax, the private demand for police protection was not strong enough to produce any police protection....If [citizens] reveal their preferences for police protection... the social demand for the services of police... can be identified by vertical addition of the private demands of the citizenry.Cops! Really? That's what makes the neoclassical model balanced -- if you see that taxes will in turn fund public goods such as the police which has positive externalities. Take the logic of the model one step further and you might even get militarization for self-defense (and for smashing unions and wall st. occupations -- the pesky institutions are too market-distortionary!!!!).
I guess cops don't have diminishing returns to scale either -- they can share donuts or something.