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CHAPTER 16. Public Goods and Tax Policy. 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. Four types of goods. Private goods: excludable and rival in consumption
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CHAPTER 16 Public Goods and Tax Policy
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
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
Goods Classification Rival Non-rival Excludable Non-excludable From Table 16.1, P.365
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
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
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
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.
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
A 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.
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
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
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
If non-rival in consumption • Marginal cost = 0 • Price should be 0 • Inefficiently low consumption
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.
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)
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
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.
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.
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
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.
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
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
Tax Efficiency • Minimizing administration costs (direct costs) • Reducing deadweight loss (indirect costs)
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
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
Tax Fairness • The benefits principle • The ones who benefit from the spending should pay for it • The ability to pay principle • The ones who are more able to pay should pay for it
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
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 Tax Bases (表一)
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
Income Redistribution: Social Security • Progressivity (vertical equity) • Individual equity • Horizontal equity • Economic efficiency
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
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
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
Economic Efficiency Achieving maximum benefit to society from available resources • Minimize any losses of efficiency that might arise unintentionally