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Public Choice Theory and the Economics of Taxation
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
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In this chapter you will learn
18.1 How public preferences are revealed through majority voting 18.2 What government failure is and why it occurs 18.3 Different ways of apportioning the tax burden 18.4 About the efficiency cost of taxes
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Chapter 18 Topics 18.1 Revealing Preferences Through Majority Voting
18.2 Government Failure 18.3 Apportioning the Tax Burden 18.4 Tax Incidence & Efficiency Loss
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Revealing Preferences Through Majority Voting
Inefficient Voting Outcomes illustration: inefficient “no” vote
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Inefficient “No” Vote the Nos win!
public good can be provided for a total expense of $900 Adams, Benson, & Conrad would share tax Adams: benefit $700 YES Benson: benefit $250 NO Conrad: benefit $200 NO
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Inefficient “No” Vote YES Benefit, Tax $300 6 Figure 18-1 $700 Adams
© 2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 18 6
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Inefficient “No” Vote YES NO Benefit, Tax $300 7 Figure 18-1 $700 $250
Adams Benson © 2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 18 7
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Inefficient “No” Vote YES NO NO Benefit, Tax $300 Figure 18-1 $700
$250 NO $200 NO Adams Benson Conrad
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The NO vote wins but is inefficient since....
Inefficient “No” Vote Figure 18-1 The NO vote wins but is inefficient since.... $700 YES Benefit, Tax $300 $250 NO $200 NO Adams Benson Conrad
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The NO vote wins but is inefficient since.... MSB = $1,150
Inefficient “No” Vote Figure 18-1 The NO vote wins but is inefficient since.... MSB = $1,150 $700 YES Benefit, Tax $300 $250 NO $200 NO Adams Benson Conrad
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The NO vote wins but is inefficient since.... MSB > MSC of $900
Inefficient “No” Vote Figure 18-1 The NO vote wins but is inefficient since.... MSB > MSC of $900 $700 YES Benefit, Tax $300 $250 Tax is $300 times 3 NO $200 NO Adams Benson Conrad
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How about an inefficient “yes” vote?
Inefficient “No” Vote Figure 18-1 The NO vote wins but is inefficient since.... MSB > MSC of $900 How about an inefficient “yes” vote? $700 YES Benefit, Tax $300 $250 Tax is $300 times 3 NO $200 NO Adams Benson Conrad
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Inefficient “Yes” Vote
Figure 18-1 Benefit, Tax $300 $100 NO Adams Benson Conrad
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Inefficient “Yes” Vote
Figure 18-1 Benefit, Tax $350 $300 YES $100 NO Adams Benson Conrad
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Inefficient “Yes” Vote
Figure 18-1 The YES vote wins but is inefficient since.... Benefit, Tax $350 $350 $300 YES YES $100 NO Adams Benson Conrad
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Inefficient “Yes” Vote
Figure 18-1 The YES vote wins but is inefficient since.... MSB $800 < MSC $900 Benefit, Tax $350 $350 $300 YES YES Tax is $300 times 3 $100 NO Adams Benson Conrad
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Revealing Preferences Through Majority Voting
Conclusion because majority voting fails to incorporate the strength of the preferences of the individual voter, it may produce economically inefficient outcomes
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Revealing Preferences Through Majority Voting
Interest Groups & Logrolling Paradox of Voting preferences voting outcomes may not reflect actual preferences illustrated…
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Weather warning system weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Weather warning system weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Weather warning system weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Weather warning system weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Weather warning system weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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seems to indicate national defense preferred to weather warning system
Table 18-1 seems to indicate national defense preferred to weather warning system Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Weather warning system
Table 18-1 Public good Adams Benson Conrad National Defense 1st choice 3rd choice 2nd choice Road Weather warning system but a direct vote indicates this is not the case Election Voting outcome national defense vs road national defense road vs weather warning system road national defense vs weather warning system weather warning system
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Revealing Choices Through Majority Voting
Median-Voter Model example…
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Median-Voter Model Example
$800 Median proposal wins Benefit $400 $300 Adams Benson Conrad
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Revealing Choices Through Majority Voting
Median-Voter Model real-world applicability implications many people will be dissatisfied by the amount of government involvement in the economy some people may “vote with their feet”
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Chapter 18 Topics 18.1 Revealing Preferences Through Majority Voting
18.2 Government Failure 18.3 Apportioning the Tax Burden 18.4 Tax Incidence & Efficiency Loss
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Government Failure Special Interest & Rent Seeking
special-interest effect pork-barrel politics rent-seeking behaviour Clear Benefits, Hidden Costs Limited & Bundled Choice Bureaucracy & Inefficiency Imperfect Institutions
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Chapter 18 Topics 18.1 Revealing Preferences Through Majority Voting
18.2 Government Failure 18.3 Apportioning the Tax Burden 18.4 Tax Incidence & Efficiency Loss
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Apportioning the Tax Burden
Benefits-Received Principle households & businesses should purchase the goods & services of government Ability-to-Pay Principle tax burden should be apportioned according to taxpayers’ income & wealth Benefits Received vs. Ability to Pay & Health Care
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Apportioning the Tax Burden
Progressive, Proportional, & Regressive Taxes definitions applications personal income tax sales taxes corporate income tax property taxes
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Chapter 18 Topics 18.1 Revealing Preferences Through Majority Voting
18.2 Government Failure 18.3 Apportioning the Tax Burden 18.4 Tax Incidence & Efficiency Loss
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Elasticity & Tax Incidence
with a specific supply, the more inelastic the demand for the product, the larger is the portion of the tax shifted to consumers illustrated…
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Elasticity & Tax Incidence
Tax of $2 per unit S D
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Elasticity & Tax Incidence
Tax of $2 per unit S shifts up $2 St $2 S D
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Elasticity & Tax Incidence
Tax of $2 per unit S shifts up $2 How is the tax burden shared? St tax S D
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Elasticity & Tax Incidence
Equilibrium price rises to $9 St tax S $9 D
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Elasticity & Tax Incidence
Equilibrium price rises to $9 Consumer’s burden is the amount of the price increase = $1 St tax S $9 D
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Elasticity & Tax Incidence
Equilibrium price rises to $9 Consumer’s burden is the amount of the price increase = $1 Firm’s burden = tax-consumer’s burden =$2 - $1 = $1 St tax S $9 D
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Elasticity & Tax Incidence
The more inelastic the demand, the greater the consumer’s burden will be St S S Di Pi tax Pe P1 D De
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Elasticity & Tax Incidence
with a specific demand, the more inelastic the supply, the larger is the portion of the tax borne by producers illustrated…
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Elasticity & Tax Incidence
The more inelastic the supply, the smaller the consumer’s burden will be S St Pe tax S P1 D D
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Elasticity & Tax Incidence
The more inelastic the supply, the smaller the consumer’s burden will be St S S tax Pe Pi P1 D D
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Efficiency Loss of a Tax
other things equal, the greater the elasticities of supply & demand, the greater the efficiency loss of a particular tax illustrated…
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Efficiency Loss of a Tax
St tax S tax paid by consumers $9 D
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Efficiency Loss of a Tax
St tax S $9 tax paid by producers D
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Efficiency Loss of a Tax
St tax S $9 efficiency loss D
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Efficiency Loss of a Tax
D' St tax S greater efficiency loss with more elastic demand
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Efficiency Loss of a Tax
St tax S efficiency loss D
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Efficiency Loss of a Tax
St tax S greater efficiency loss with more elastic supply D
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Tax Incidence & Efficiency Loss
Qualifications redistributive goals reducing negative externalities
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Tax Incidence & Efficiency Loss
Probable Incidence of Taxes in Canada personal income tax corporate income tax sales & excise taxes international comparison…
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GLOBAL PERSPECTIVE 18.1
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Tax Incidence & Efficiency Loss
Probable Incidence of Taxes in Canada personal income tax corporate income tax sales & excise taxes property taxes
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Recent Canadian Tax Reform
The 1987 Tax Reform The GST Reforms Since 2000
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Chapter 18 Topics 18.1 Revealing Preferences Through Majority Voting
18.2 Government Failure 18.3 Apportioning the Tax Burden 18.4 Tax Incidence & Efficiency Loss
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