Presentation on theme: "Public Goods and Tax Policy"— Presentation transcript:
1Public Goods and Tax Policy CHAPTER 16Public Goodsand Tax Policy
2Goods Classifications: Excludablecan prevent people from consuming without payingRival in consumptioncan not be consumed by more than one person at the same time
3Four types of goods Private goods: excludable and rival in consumptionCollective goods (Artificially scarce goods):excludable and non-rival in consumptionCommons goods (common resources):non-excludable and rival in consumptionPublic goods:non-excludable and non-rival in consumption
5Goods Classification Rival Non-rival Excludable Non-excludable Private good(wheat)Collective good(pay-per-view TV)Commons good(fish in the ocean)Public good(national defense)ExcludableNon-excludableFrom Table 16.1, P.365
6HW5 Explain the characteristics of the 4 types of goods 4 types: private; collective; common; publicList 5 goods that belong to each of the 4 types and explain
7Private Goods: Excludable and rival in consumption Non-payers can be easily excludedEach unit consumed by one person means one less unit available for othersthe only goods that can be efficiently produced and consumed by market
8Collective Good: (Artificially Scarce Goods) Excludable but non-rival in consumptionIt is not really scarce: use by one person does not reduce its availability to othersBut it can be excludable: people who do not pay can be prevented from using it
9Artificially Scarce Goods An artificially scarce good is excludable and non-rival in consumption. It is made artificially scarce because producers charge a positive price but the marginal cost of allowing one more person to consume the good is zero.
10Common Goods: (Common Resources) Non-excludable and rival in consumptionNon-payers cannot be easily excludedEach unit consumed by one person means one less unit available for othersThe problem of overuse - a user depletes the amount of the common resource available to others but does not take this cost into account when deciding how much to use the common resource
11A Common Resource Fishing in a public river: Each fisherman’s individual marginal cost does not include the cost that his or her actions impose on others: the depletion of the common resource the marginal social cost curve, MSC, lies above the supply curve; in an unregulated market, the quantity of the common resource used, QMKT, exceeds the efficient quantity of use, QOPT.
12The Efficient Use and Maintenance of a Common Resource Use taxesMake it excludable and assign property rightsCreate of a system of tradable licenses for the right to use the common resource
13Public Good:A good or service that, at least to some degree, is both non-rival and non-excludableNon-rival GoodA good whose consumption by one person does not diminish its availability to othersNon-excludable GoodA good that is difficult, or costly, to exclude non-payers from consuming
14If non-excludable:Rational consumers won’t be willing to pay for the goodPeople who do not pay can not be prevented from consumingFree-rider problem: individuals have no incentive to pay for their own consumptionInefficiently low production
15If non-rival in consumption Marginal cost = 0Price should be 0Inefficiently low consumption
16What goods and services should government provide? Pure Public GoodA good or service that, to a high degree, is both non-rival and non-excludablePure public goods should be provided by government because:For-profit private firms would find it difficult to recover their costs of production.Since the MC of serving additional users is zero once the good has been produced, then charging for the good would be inefficient.
17Cost-Benefit Analysis Social costs and social benefitsPeople have no incentive to pay for efficient quantity of public goodsPeople tend to overstate the value of public goods (people tend to prefer too much of the goods when they don’t have to pay for it: marginal cost is 0)
18Advantages of Using Government to Provide Public Goods Cost of adding a tax is relatively lowMinimizes the difficulty in determining who will bear what share of the tax burdenMay be the only feasible provider
19Government ProvisionA pure public good should be provided by the government only when the benefit exceeds the cost.The cost of the public good is the sum of the explicit and implicit costs incurred to produce it.The benefit of the public good is the sum of the reservation prices of all people who want the good.
20Government taxes: the way to finance public goods Paying for Public GoodsNot everyone benefits equally from a public good or service.Therefore, the most equitable way to pay for the public good or service is to tax people in proportion to their willingness to pay.
21Tax System Head Tax Proportional Income Tax A tax that collects the same amount from every taxpayerA head tax rule will rule out the provision of many worthwhile public goods.Proportional Income TaxA tax under which all taxpayers pay the same proportion of their incomes in taxes
22Tax System Regressive Tax Progressive Tax A tax under which the proportion of income paid in taxes declines as income risesProgressive TaxOne in which the proportion of income paid in taxes rises as income rises.
23Alternatives to using taxes to fund public goods: Funding by donationDevelopment of new means to exclude non-payersPrivate contractingSale of by-products
24Tax System Trade-off between equality and efficiency Equity: fairness, the “right” people actually bears the tax burdenEfficiency: minimizes the direct and indirect tax collection costs to the economy
27To Reduce Deadweight Loss Taxes decreases the price the producers receive and increases the price the consumers payThe incidence of tax is determined by the elasticities of demand and supplyTo reduce the deadweight loss caused by tax, impose taxes on the ones who have the most inelastic responses
28To Lower Administration Costs Administration costs: the resources actually spent on collecting and paying the taxesThe difficulties of calculating, collecting and paying the taxes
29The benefits principle Tax FairnessThe benefits principleThe ones who benefit from the spending should pay for itThe ability to pay principleThe ones who are more able to pay should pay for it
30The Tax SystemTax bases: the income or property value that determines how much tax an individual paysTax Structure: how the tax depends on the tax baseProportionalProgressiveRegressive
32Income Redistribution through Taxes and Government Spending Progressive taxes: taking more money away from the rich to provide supports for the poorGovernment Spending: transfer paymentsWelfareIn-kind transfersNegative income tax
33Income Redistribution: Social Security Progressivity (vertical equity)Individual equityHorizontal equityEconomic efficiency
34Progressivity: Redistribution from the better-off to the less well-off Redistribute resources to the elderly from the rest of the population (intergenerational redistributionHigher rate of return on the contributions of workers with lower wages than for those with higher wages
35Individual Equity Ensuring a fair return on contribution Individuals should be paid retirement benefits that, on average, equal their contributions plus a fair interest rateThe allocative and distributive functions of government are combined into a single programBenefits are paid out before adequate contributions have been built up
36Horizontal Equity Equal treatment for equals Equal assessment of payroll taxes on those with equal earningsEqual benefits to those born in the same year, with equal earnings histories, and of the same family type
37Economic EfficiencyAchieving maximum benefit to society from available resourcesMinimize any losses of efficiency that might arise unintentionally