Public Goods & Taxes Chapter 11

Public vs. Private Goods Public Goods Goods that are neither excludable nor rival in consumption Private Goods Goods that are both excludable & rival in consumption Excludable- consumer who can not pay are excluded Rival- consumption by one reduces quantity for others Public Goods examples: clean air, police protection, radio signals, national defense Private Goods: Food, Coffee, airline tickets, automobiles, etc…

Problems with Public Goods Free-rider- a person who receives the benefit of a good but avoids paying for it Examples: “Slacker” in group work at school Volunteer for neighborhood cleanup Fundraising for Fire Department

Public Good Efficiency When goods are available free of charge => market forces will not allocate resources efficiently Government should collect taxes & provide public goods whenever Total Benefits ≥ Total Costs Examples: National Defense Basic Research Fighting Poverty Fireworks on 4th of July

Tragedy of the Commons Common Resources – “commonly” owned resources rival in consumption but non-excludable Example: fish in ocean, the environment Tragedy of the Commons- the absence of incentives to prevent “overuse” & depletion of a common resource

.

Tragedy of the Commons Reading

Types of Taxes Progressive Tax- Regressive Tax- Tax Incidence: Income ↑ => Average Tax Rate ↑ Example: U.S. Federal Income Tax Regressive Tax- Income ↑ => Average Tax Rate ↓ Example: Gasoline Tax, Bridge Tax Proportional Tax Income ↑ or ↓ => Average Tax Rate stays the same Example: Flat Income Tax, Corporate Taxes Excise Tax Flat fee per unit, paid at purchase Example: Cigarettes, Gasoline (both are also regressive in tax incidence) Tax Incidence: Who Pays?

} Progressive Income Tax Tax Brackets Example: If you Earn $100,000   Total:   $ 22,746 Actual Tax Rate: 22.7%

The income Gap has widened last Top 1% pay more taxes but The income Gap has widened last 30-Years

EQUAL % tax cuts What best stimulates economic growth?

Practice Test: Public Goods