1. Public Goods and Tax Policy
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
Private good
(wheat)
Collective good
(pay-per-view TV)
Commons good
(fish in the ocean)
Public good
(national defense)
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 Proportional Income 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 Progressive 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. Minimizing administration costs (direct costs)
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. The benefits principle
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. Tax Bases 劳动所得 自有资产所得 偶然所得 其他所得 11.经国务院财政部门确定征税的其他所得 2． 个体工商户的生产、经营所得
（表一）
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； 　　 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

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