CHAPTER 11 – PUBLIC GOODS AND COMMON RESOURCESImportant characteristics of goodsA good is rival in consumption if one person’s use of it diminishes others’ use of the goodA good is excludable if a person can be prevented from using itPrivate goods: excludable & rival in consumptionMarkets work best for private goodsExample- someone eats an ice cream cone- someone else cannot eat that ice cream come & would not give it to someone elsePublic goods: goods that are neither excludable nor rival in consumptionNo one can be excluded from consuming even if they have not paid for itExternalities may arise*Example- tornado siren- everyone hears it & gets the benefits, cannot prevent anyone from hearing itCommon resources: goods that are rival in consumption but not excludableExternalities may arise*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 bigClub goods: goods that are excludable but not rival in consumptionExample- 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 everyonePublic goodsThe free-rider problemFree rider: a person who receives the benefit of a good but avoids paying for itExampleA fireworks display that is free to viewEnjoyment exceeds cost to display the fireworksEllen wants to put on a display that you must pay to seePeople will choose to view the free display than a display that you have to pay to viewSolution- raise taxes and local gov. can pay to put on the display & pay Ellen to do itBecause public goods are not excludable, the free-rider problem prevents the private market from supplying themProblem occurs when:The number of beneficiaries is large & exclusion of any one is impossibleGov. can potentially fix the problemIf gov. decides that total benefits exceed its costs, it can provide the public good, pay for it with tax revenue, & make everyone better offSome important public goods1. National defense2. Basic research3. Fighting poverty**Lighthouses (in-class example) – could be closer to private goodsThe difficult job of cost-benefit analysisGov. may provide public goods because the private market on its own will not produce an efficient quantity analysis decides whether they should play a roleCost-benefit analysis: a study that compares the costs & benefits to society of providing a public goodQuantifying benefits is difficultCommon resourcesOnce the common resource is provided, policymakers need to be concerned about how much is usedThe tragedy of the CommonsTragedy of the Commons: a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a wholeExampleIn a town, everyone can graze their sheep on one part of landLand is plentiful so everyone is happyPopulation grows, too many sheep grazeLand becomes barren, people losePeople do not have an incentive to reduce their sheep population externality arisesCould have been prevented in regulation of numbers of sheep, taxing sheep, auctioning off a limited number of grazing permits, divide land among town familiesWhen one person uses a common resource, they diminish other people’s enjoyment of it negative externalityCommon resources tend to be used excessivelyGov. options to fix the externality:Regulation, taxes, turning common resource into private goodSome important common resources1. Clean air & water2. Congested roads3. Fish, whales, other wildlifeConclusion: the importance of property rightsMarket fails to allocate resources efficiently because property rights are not well establishedSome item of value does not have an owner with the legal authority to control itGov. intervention can helpCHAPTER 12 – THE DESIGN OF THE TAX SYSTEM**CalculationsTaxable income = (total income) – (amount based on number of dependents) – (deductible expenses)MARGINAL TAX: percentage of the bracket where the income endsAVERAGE TAX: taxes owed/incomeTAXES OWED: use each part of the income calculated with each separate percentageA financial overview of the US governmentUS economy’s income has grown so the gov.’s revenue from taxation has grown as wellTax burden is low compared to European countries, higher than less economically developed countriesThe federal governmentCollects 2/3 of the taxes in the economyLargest source of revenue = individual income tax & payroll taxes for social insuranceTax liability: how much a person owes in taxesMarginal tax rate: the tax rate applied to each additional dollar of incomeRises as income risesPayroll tax: a tax on the wages that a firm pays its workersAlso called social insurance taxesUsed to pay for social security & MedicareCorporate income tax: taxes based on profit, smaller than other taxesTransfer payment: gov. payment not made in exchange for a good or service (example- social security)2009 receiptsIndividual income taxSocial insurance taxCorporate income taxOther2009 spendingSocial securityNational defenseIncome securityMedicareHealthNet interestOther5 major benefit programs for low-income householdsWelfare (cash assistance)Medicaid (healthcare for those on welfare & other poor children)Food stamps (vouchers for purchase of food)Supplemental security income (cash to the low-income elderly & disabled)Public housing & rental vouchers (housing assistance)Budget deficit: an excess of gov. spending over gov. receiptsBudget surplus: an excess of gov. receipts over gov. spendingState and local governmentLargest sources of revenue = sales tax & property taxSales tax: percentage of the total amount spent at retail storesSome states exclude necessitiesProperty tax: percentage of the estimated value of land & structures paid by property owners2007 receiptsSales taxProperty taxIndividual income taxCorporate income taxFrom federal gov.Other2007 spendingEducationPublic welfareHighwaysOtherTaxes and efficiencyObjectives: efficiency & equalityTries to minimize deadweight losses & administrative burdensEfficiency refers to the costs it imposes on taxpayersDeadweight 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 goodAdministrative burden (2nd cost of efficiency)Examples (type of deadweight loss)Time & money spent documenting, computing, & avoiding taxesResources gov. has to use to enforce tax
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