Chapter 11 11 08 2012 CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES Important characteristics of goods A good is rival in consumption if one person s use of it diminishes others use of the good A good is excludable if a person can be prevented from using it Private goods excludable rival in consumption o Markets work best for private goods o Example someone eats an ice cream cone someone else cannot eat that ice cream come would not give it to Public goods goods that are neither excludable nor rival in o No one can be excluded from consuming even if they have someone else consumption not paid for it o Externalities may arise o Example tornado siren everyone hears it gets the benefits cannot prevent anyone from hearing it Common resources goods that are rival in consumption but not excludable o Externalities may arise o Example fish in the ocean one person catches fish which reduces the amount for someone else to catch cannot prevent people from catching other fish because it is so big Club goods goods that are excludable but not rival in consumption o Example fire protection in a small town firemen do not have to go to every fire but when they exist are paid for there are enough to protect everyone Public goods The free rider problem Free rider a person who receives the benefit of a good but avoids paying for it Example o A fireworks display that is free to view o Enjoyment exceeds cost to display the fireworks o Ellen wants to put on a display that you must pay to see o People will choose to view the free display than a display that o Solution raise taxes and local gov can pay to put on the you have to pay to view display pay Ellen to do it Because public goods are not excludable the free rider problem prevents the private market from supplying them Problem occurs when o The number of beneficiaries is large exclusion of any one is impossible Gov can potentially fix the problem o If gov decides that total benefits exceed its costs it can provide the public good pay for it with tax revenue make everyone better off Some important public goods 1 National defense 2 Basic research 3 Fighting poverty Lighthouses in class example could be closer to private goods The difficult job of cost benefit analysis Gov may provide public goods because the private market on its own will not produce an efficient quantity analysis decides whether they should play a role Cost benefit analysis a study that compares the costs benefits to society of providing a public good Quantifying benefits is difficult Common resources Once the common resource is provided policymakers need to be concerned about how much is used The tragedy of the Commons Tragedy of the Commons a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole Example o In a town everyone can graze their sheep on one part of land o Land is plentiful so everyone is happy o Population grows too many sheep graze o Land becomes barren people lose o People do not have an incentive to reduce their sheep population externality arises o Could have been prevented in regulation of numbers of sheep taxing sheep auctioning off a limited number of grazing permits divide land among town families When one person uses a common resource they diminish other people s enjoyment of it negative externality Common resources tend to be used excessively Gov options to fix the externality o Regulation taxes turning common resource into private good Some important common resources 1 Clean air water 2 Congested roads 3 Fish whales other wildlife Conclusion the importance of property rights Market fails to allocate resources efficiently because property rights Some item of value does not have an owner with the legal authority are not well established to control it Gov intervention can help Chapter 12 11 08 2012 CHAPTER 12 THE DESIGN OF THE TAX SYSTEM Calculations Taxable income total income amount based on number of dependents deductible expenses MARGINAL TAX percentage of the bracket where the income ends AVERAGE TAX taxes owed income TAXES OWED use each part of the income calculated with each separate percentage A financial overview of the US government US economy s income has grown so the gov s revenue from taxation has grown as well Tax burden is low compared to European countries higher than less economically developed countries The federal government Collects 2 3 of the taxes in the economy Largest source of revenue individual income tax payroll taxes for social insurance Tax liability how much a person owes in taxes Marginal tax rate the tax rate applied to each additional dollar of income o Rises as income rises Payroll tax a tax on the wages that a firm pays its workers o Also called social insurance taxes o Used to pay for social security Medicare Corporate income tax taxes based on profit smaller than other taxes Transfer payment gov payment not made in exchange for a good or service example social security 2009 receipts o Individual income tax o Social insurance tax o Corporate income tax o Other 2009 spending o Social security o National defense o Income security o Medicare o Health o Net interest o Other 5 major benefit programs for low income households o Welfare cash assistance o Medicaid healthcare for those on welfare other poor o Food stamps vouchers for purchase of food o Supplemental security income cash to the low income elderly children disabled o Public housing rental vouchers housing assistance Budget deficit an excess of gov spending over gov receipts Budget surplus an excess of gov receipts over gov spending State and local government Largest sources of revenue sales tax property tax Sales tax percentage of the total amount spent at retail stores o Some states exclude necessities Property tax percentage of the estimated value of land structures paid by property owners 2007 receipts o Sales tax o Property tax o Individual income tax o Corporate income tax o From federal gov o Other 2007 spending o Education o Public welfare o Highways o Other Taxes and efficiency Objectives efficiency equality o Tries to minimize deadweight losses administrative burdens Efficiency refers to the costs it imposes on taxpayers Deadweight losses 1st cost of efficiency The inefficiency that a tax creates as people allocate resources according to the tax incentive rather than the true costs benefits of the good Administrative burden 2nd cost of efficiency Examples type of deadweight loss o Time money
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