Market Failure and Government

Government and Market Failure Externalities Coase Theorum Public Goods Tax Types and Theories Wealth Disparity and Redistribution of Income Asymmetric Information *Chapters 12, 19, and 20*

*The next several slides are just a review of tax incidence and DWL of tax and subsidy

Tax Incidence

Nominal (Statutory) versus Economic Incidence If “law” doesn’t matter, what does?

Deadweight Loss Allocative Inefficiency Do subsidies produce DWL?? If so, where does it appear?

Deadweight Loss of Subsidy

Deadweight Loss Could a tax eliminate deadweight loss?

Agenda Why +MEC or –MEB won’t change tax incidence or nominal price Coase Theorum Article (1 page…okay 1 ½) Public v. Private Goods Tax Philosophies and Types **HW- Coase Theorem and Pollution Due tomorrow- collected

Externalities- simplified Negative – MPC < MSC – Per unit tax equal to MEC Positive – MPB<MSB – Per unit subsidy equal to MEB

Coase Theorum "if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights”

Public v. Private Goods Pure Private – Excludable and Rival – Example: Chia Pets Pure Public – Nonexcludable and Nonrival – Example: National Defense – Government generally must provide – Free Rider Problem Solutions: taxes versus donations

Public v. Private Goods Toll Goods – Excludable and nonrival – Example: Cable TV, Toll Road (often natural monopolies) Common-pool Resources – Nonexcludable and rival – Example: fish in the public waters, congested roads – Government often regulates Quotas, licensing fees

Answers According to AP Resource Guide Red denotes a strong argument for alternative placement, but I guess we should go with the AP guide. Pure Private Goods Electric Power Haircut Rabies Shot Potato Chip Common Resource Toll Goods College education Amusement Park Cable TV Panama Canal Uncongested Toll roads and bridges Healthcare National Forest Campgrounds Pure Public Goods National Defense Spraying for Mosquitos Street Lights Police and Fire Protection

Paying for Public Goods- Tax Philosophies Benefits Received Principle – Closer to free market solution – Example- Gas tax to fund highways/Cigarette Tax Ability to Pay Principle – Redistribution of Wealth/Equity – Example: Progressive income tax

State Revenue

Taxes Progressive Proportional (flat) Regressive *Based on % of income

Income Tax Progressive Tax (Federal)

Income Tax Progressive Tax (Federal)

State (PA) Income Tax Proportional Tax/Flat Tax PA = 3.07%

State Sales Tax 6% Proportional or Regressive?

Social Security Tax Social Security – Employee 6.2% on first $117,000 0% above $117,000 Regressive tax – Payroll Tax Employer matches contribution

Social Security Tax Who really pays it? Is it shared equally as the law would suggest? Does it depend on the particular labor market?

Taxes on Kevin White

Distribution of Wealth Measures – Lorenz Curve and Gini Coefficient (see handout) Redistribution/Reduction of Inequality – Transfers – Control Market Prices – Progressive Taxes Efficiency versus Equity

Measuring Inequality Lorenz Curve – Farther from 45 = greater inequality Gini Coefficient – 0 = complete equality – 1 = complete inequality – A/A+B

Redistribution/Reduction of Inequality – Transfers WIC TANF SNAP Unemployment Comp Obamacare – Control Market Prices Minimum wage Rent control – Progressive Taxes Income Tax – largest federal revenue source

Equity versus Efficiency Thoughts? Cons of each?

Asymmetric Information Adverse Selection -Before Transaction Examples -Used Cars -Health Insurance -Loans -Infomercials *I was watching QVC Moral Hazard -After Transaction Examples -Health Insurance -Car Insurance -Loans -Helmet Requirements

Asymmetric Information Private Remedies -screenings -credit checks -warranties Public Remedies -inspections -standards -certifications -reports -lemon laws

Public Choice Theory Rational Choice Theory- individuals act in self-interest Private Sector- yep Public Sector- yep Uhhh ohhh…

Public Choice Theory Private Sector- generally profits Public Sector – Power – Special Interests – Rent Seeking – Bribes – Reelection – How good would some nachos and wings be right now?

Public Choice Theory Market Failure v. Government Failure