1. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 1 Government Spending, Revenue, and Public Choice 14 14.1 Public Goods and Taxation 14.2 Federal, State, and Local Budgets 14.3 Economics of Public Choice

2. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 2 How does the demand for public goods differ from the demand for private goods? How are responsibilities divided among levels of government? How big is the federal budget, and where does the money go? Why do politicians need to deal with special interest groups? Why is it hard to interest the public in the public interest? CONSIDER

3. CONTEMPORARY ECONOMICS© Thomson South-Western 14.1Public Goods and Taxation  Calculate the optimal quantity of a public good.  Distinguish between the two principles of taxation.  Identify other government revenue sources besides taxes. Objectives

4. CONTEMPORARY ECONOMICS© Thomson South-Western 14.1Public Goods and Taxation  benefits-received tax principle  ability-to-pay tax principle  tax incidence  proportional taxation  progressive taxation  regressive taxation  marginal tax rate Key Terms

5. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 5 Public Goods The demand for public goods A public good is different because it is nonrival in consumption. A public good is available to all consumers in an identical amount. Optimal quantity of the public good The efficient level of the public good is found where the sum of the marginal benefits equals the marginal cost of providing the good.

6. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 6 Market Demand for a Public Good Figure 14.1 Because public goods are available to all in identical amounts, the market demand for a public good sums up each person’s demand at each quantity. In this example, the neighborhood demand for mosquito spraying sums up Alan’s demand, D a, and Maria’s demand, D m.

7. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 7 Tax Principles Benefits-received taxation—those who receive more benefits from the government program funded by a tax should pay more of that tax Ability-to-pay tax principle—those with a greater ability to pay, such as those with a higher income, should pay more of a tax

8. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 8 Other Revenue Issues Tax incidence—indicates who actually bears the burden of a tax Proportional taxation—the tax as a percentage of income remains constant as income increases; also called a flat tax Progressive taxation—the tax as a percentage of income increases as income increases Regressive taxation—the tax as a percentage of income decreases as income increases

9. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 9 Other Revenue Issues Marginal tax rate—the percentage of each additional dollar of income that goes to pay a tax Pollution taxes and sin taxes User fees Borrowing (continued)

10. CONTEMPORARY ECONOMICS© Thomson South-Western LESSON 14.1 SLIDE 10 Top Marginal Tax Rate on Personal Income, 1913–2006 Figure 14.2