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CHAPTER 16 Public Goods and Tax Policy

CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

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Page 1: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

CHAPTER 16

Public Goods and Tax Policy

Page 2: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Goods Classifications:

Excludable– can prevent people from consuming

without paying Rival in consumption

– can not be consumed by more than one person at the same time

Page 3: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Four types of goods

Private goods: – excludable and rival in consumption

Collective goods (Artificially scarce goods): – excludable and non-rival in consumption

Commons goods (common resources):– non-excludable and rival in consumption

Public goods:– non-excludable and non-rival in

consumption

Page 4: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Four types of goods

Page 5: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Private good(wheat)

Collective good(pay-per-view TV)

Commons good(fish in the ocean)

Public good(national defense)

Rival Non-rival

Non-excludable

Excludable

From Table 16.1, P.365

Goods Classification

Page 6: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

HW5

Explain the characteristics of the 4 types of goods

4 types: private; collective; common; public

List 5 goods that belong to each of the 4 types and explain

Page 7: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Private Goods:

Excludable and rival in consumption Non-payers can be easily excluded Each unit consumed by one person

means one less unit available for others the only goods that can be efficiently

produced and consumed by market

Page 8: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Collective Good:(Artificially Scarce Goods)

Excludable but non-rival in consumption– It is not really scarce: use by one person

does not reduce its availability to others– But it can be excludable: people who do

not pay can be prevented from using it

Page 9: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Artificially 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.

Page 10: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Common Goods:(Common Resources)

Non-excludable and rival in consumption– Non-payers cannot be easily excluded– Each unit consumed by one person means one

less unit available for others

The 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

Page 11: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

A Common ResourceFishing 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.

Page 12: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

The Efficient Use and Maintenance of a Common Resource

Use taxes Make it excludable and assign property

rights Create of a system of tradable licenses

for the right to use the common resource

Page 13: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Public Good:

A good or service that, at least to some degree, is both non-rival and non-excludable– Non-rival Good

• A good whose consumption by one person does not diminish its availability to others

– Non-excludable Good• A good that is difficult, or costly, to exclude

non-payers from consuming

Page 14: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

If non-excludable:

Rational consumers won’t be willing to pay for the good

People who do not pay can not be prevented from consuming

Free-rider problem: individuals have no incentive to pay for their own consumption

Inefficiently low production

Page 15: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

If non-rival in consumption

Marginal cost = 0Price should be 0 Inefficiently low consumption

Page 16: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

What goods and services should government provide?

Pure Public Good– A good or service that, to a high degree, is both

non-rival and non-excludable

Pure 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.

Page 17: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Cost-Benefit Analysis

Social costs and social benefits People have no incentive to pay for

efficient quantity of public goods People 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)

Page 18: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Advantages of Using Government to Provide Public Goods

Cost of adding a tax is relatively low Minimizes the difficulty in determining

who will bear what share of the tax burden

May be the only feasible provider

Page 19: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Government Provision

A 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.

Page 20: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Government taxes: the way to finance public goods

Paying for Public Goods– Not 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.

Page 21: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax System

Head Tax– A tax that collects the same amount from

every taxpayer– A head tax rule will rule out the provision of

many worthwhile public goods. Proportional Income Tax

– A tax under which all taxpayers pay the same proportion of their incomes in taxes

Page 22: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax System

Regressive Tax– A tax under which the proportion of income

paid in taxes declines as income rises Progressive Tax

– One in which the proportion of income paid in taxes rises as income rises.

Page 23: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Alternatives to using taxes to fund public goods:

Funding by donation Development of new means to exclude

non-payers Private contracting Sale of by-products

Page 24: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax System

Trade-off between equality and efficiency– Equity: fairness, the “right” people

actually bears the tax burden

– Efficiency: minimizes the direct and indirect tax collection costs to the economy

Page 25: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax Efficiency

Minimizing administration costs (direct costs)

Reducing deadweight loss (indirect costs)

Page 26: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Recall: excise tax

Page 27: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

To Reduce Deadweight Loss

Taxes decreases the price the producers receive and increases the price the consumers pay

The incidence of tax is determined by the elasticities of demand and supply

To reduce the deadweight loss caused by tax, impose taxes on the ones who have the most inelastic responses

Page 28: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

To Lower Administration Costs

Administration costs: the resources actually spent on collecting and paying the taxes

The difficulties of calculating, collecting and paying the taxes

Page 29: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax Fairness

The benefits principle–The ones who benefit from the

spending should pay for itThe ability to pay principle

–The ones who are more able to pay should pay for it

Page 30: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

The Tax System

Tax bases: the income or property value that determines how much tax an individual pays

Tax Structure: how the tax depends on the tax base– Proportional– Progressive– Regressive

Page 31: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Tax Bases

(表一)

劳动所得1 .  工资、薪金所得;2.  个体工商户的生产、经营所得3.  对企事业单位的承包经营、承租经营所得4.  劳务报酬所得5.  稿酬所得

自有资产所得

6.  特许权使用费所得;        7.  利息、股息、红利所得;        8.  财产租赁所得;        9.  财产转让所得;

偶然所得 10. 一些偶然性所得

其他所得 11. 经国务院财政部门确定征税的其他所得

Page 32: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Income Redistribution through Taxes and Government Spending

Progressive taxes: taking more money away from the rich to provide supports for the poor

Government Spending: transfer payments– Welfare– In-kind transfers– Negative income tax

Page 33: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Income Redistribution: Social Security

Progressivity (vertical equity)Individual equityHorizontal equityEconomic efficiency

Page 34: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Progressivity:

Redistribution from the better-off to the less well-off

Redistribute resources to the elderly from the rest of the population (intergenerational redistribution

Higher rate of return on the contributions of workers with lower wages than for those with higher wages

Page 35: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Individual Equity

Ensuring a fair return on contribution Individuals should be paid retirement

benefits that, on average, equal their contributions plus a fair interest rate

The allocative and distributive functions of government are combined into a single program

Benefits are paid out before adequate contributions have been built up

Page 36: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Horizontal Equity

Equal treatment for equals Equal assessment of payroll taxes on

those with equal earnings Equal benefits to those born in the

same year, with equal earnings histories, and of the same family type

Page 37: CHAPTER 16 Public Goods and Tax Policy. Goods Classifications: Excludable –can prevent people from consuming without paying Rival in consumption –can

Economic Efficiency

Achieving maximum benefit to society from available resources

Minimize any losses of efficiency that might arise unintentionally