Chapter 11 Public Goods and Common Resources The Different Kinds of Goods the property of a good whereby a person can be prevented from Excludability using it o Can people be prevented from using the good Rival in Consumption o The property of a good whereby one person s use diminishes other people s use it it o Does one person s use of the good reduce another person s ability to use Private Goods Excludable and rival in consumption o Example ice cream Excludable because it is possible to prevent someone from eating Rival in consumption because if you buy it then someone else can t buy the exact same one Public Goods neither excludable nor rival in consumption o Example tornado siren Not excludable because once the siren sounds it is impossible to prevent any single person form hearing it Not rival in consumption because it is meant for everyone to hear at once Common Resources rival in consumption but not excludable o Example fish in the ocean Rival in consumption because when one person catches fish there are fewer fish for the next person to catch Not excludable because it is difficult to stop someone from catching a particular fish Natural monopoly excludable but not rival in consumption o Example fire protection in a small town Excludable because the fire department can just let the house burn down Not rival in consumption because once a town has paid for the fire department the additional cost of protecting one more house is small Free Rider a person who receives the benefit of a good but avoids paying for it Public Goods The Free Rider Problem Some Important Public Goods National Defense Basic Research Fighting Poverty o One of the most expensive public goods o Advocates of antipoverty programs claim that fighting poverty is a public good Even though everyone prefers living in a society without poverty fighting poverty is not a good that private actions will provide o Taxing rich to give welfare to the poor The Difficult Job of Cost Benefit Analysis Cost benefit Analysis a study that compares the costs and benefits to society of providing a public good It s hard to determine the cost benefit of a good because people who like it will exaggerate its benefits and people opposed to it will exaggerate its harm Common Resources Not excludable and rival in consumption Tragedy of the Commons used more than is desirable from the standpoint of society as a whole a parable that illustrates why common resources are The Tragedy of the Commons Example if a town allows everyone to let sheep graze on whatever land chosen eventually the land is going to become barren and the wool industry is going to be destroyed o Avoiding destruction could be possible if the shepherds collectively worked together however they are each concerned with themselves o When one family allows its sheep to graze the land is being taken away o When one person uses a common resource he or she diminishes other from another family people s enjoyment of it Resolution regulation or taxes to reduce consumption sometimes Some Important Common Resources turned in to a private good Clean air and water o Pollution Congested roads o Can be solved with tolls etc Fish Whales and Other Wildlife o Many species of animals have commercial value Chapter 12 The Design of the Tax System A Financial Overview of The US Government Sweden has the highest tax rate 50 As a nation gets richer government typically takes a larger share of income in taxes The Federal Government Collect about 2 3 of nations taxes Most important taxes individual income taxes and payroll taxes Tax liability the amount someone is required to pay in taxes based on income and other factors Taxable income total income deductibles Marginal tax rate the tax rate applied to each additional dollar of income Excise taxes taxes on goods gasoline etc Transfer payment a government payment not made in exchange for a good or service social security Budget Deficiency an excess of government spending over government receipts o Government sells debt to private sector bonds to make up for deficiency Budget Surplus an excess of government receipts over government spending o Excess receipts to get rid of surplus State and Local Government Collect about 1 3 of nations taxes Most important taxes Sales and property taxes Education is largest spending Welfare is second largest Sales tax Property taxes State income taxes An efficient tax system is one that imposes small deadweight losses and small When total consumer surplus is lower than tax revenue then there is a deadweight Taxes and Efficiency administrative burdens Deadweight Losses loss Administrative Burden Taxes take time and money to fill out Marginal Tax Rates Versus Average Tax Rates Average Tax Rate Marginal Tax Rate total taxes paid total income extra taxes paid on an additional dollar of income Lump Sum Taxes a tax that is the same amount for every person Lump Sum Taxes Taxes and Equity The Benefits Principle Benefits Principle they receive from government services the idea that people should pay taxes based on the benefits The Ability to Pay Principle Ability to pay Principle the idea that taxes should be levied on a person Horizontal equity the idea that taxpayers with similar abilities to pay taxes should Vertical equity states that taxpayers with a greater ability to pay taxes should according to how well that person can shoulder the burden contribute a larger amount pay the same amount Proportional tax their income than do low income taxpayers Progressive tax their income than do lower income tax payers Regressive tax all taxpayers pay the same fraction of income a tax for which high income taxpayers pay a smaller fraction of a tax for which high income taxpayers pay a larger fraction of Tax Incidence and Tax Equity Tax incidence who bares the burden of taxes Trade off between efficiency and equity Chapter 13 The Costs of Production Industrial organization the study of how firms decisions about prices and quantities depend on the market conditions they face What Are Costs Total Revenue Total Cost and Profit Goal of firms maximize profit Total Revenue Total Cost Profit total revenue minus total cost Costs As Opportunity Costs the amount a firm receives for the sales of its output the market value of the inputs a firm uses in production Economic Profit implicit costs Accounting Profit Explicit Costs input costs that require an outlay of money by the firm o Baker pays for ingredients cost money spent on flour Implicit
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