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CHAPTER 16

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

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  1. CHAPTER 16 Public Goods and Tax Policy

  2. 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

  3. 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

  4. Four types of goods

  5. Goods Classification Rival Non-rival Excludable Non-excludable From Table 16.1, P.365

  6. 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

  7. 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

  8. 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

  9. 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.

  10. 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

  11. 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.

  12. 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

  13. 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

  14. 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

  15. If non-rival in consumption • Marginal cost = 0 • Price should be 0 • Inefficiently low consumption

  16. 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.

  17. 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)

  18. 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

  19. 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.

  20. 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.

  21. 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

  22. 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.

  23. 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

  24. 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

  25. Tax Efficiency • Minimizing administration costs (direct costs) • Reducing deadweight loss (indirect costs)

  26. Recall: excise tax

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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)

  32. 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

  33. Income Redistribution: Social Security • Progressivity (vertical equity) • Individual equity • Horizontal equity • Economic efficiency

  34. 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

  35. 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

  36. 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

  37. Economic Efficiency Achieving maximum benefit to society from available resources • Minimize any losses of efficiency that might arise unintentionally

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