1. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eOSullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER 16 Public Goods, Taxes, and Public Choice

2. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Spillover Benefits Certain goods and services would not exist unless we make a collective effort to produce them.Certain goods and services would not exist unless we make a collective effort to produce them. The government can help make collective decisions about paying for goods that generate spillover benefits.The government can help make collective decisions about paying for goods that generate spillover benefits.

3. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Spillover Benefits A market with spillover benefits is inefficient, so there is an opportunity for government to promote efficiency.A market with spillover benefits is inefficient, so there is an opportunity for government to promote efficiency. Spillover PRINCIPLE For some goods, the costs or benefits associated with the good are not confined to the person or organization that decides how much of the good to produce or consume.

4. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Public Goods A public good is a good available for everyone to consume, regardless of who pays and who doesnt.A public good is a good available for everyone to consume, regardless of who pays and who doesnt. A private good is consumed by a single person or household.A private good is consumed by a single person or household.

5. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Public Goods Public goods are nonrival in consumption (available for everyone to consume) and nonexcludable (it is impractical to exclude people who dont pay).Public goods are nonrival in consumption (available for everyone to consume) and nonexcludable (it is impractical to exclude people who dont pay). Private goods are rival in consumption (only one person can consume the good), and excludable (it is possible to exclude a person who does not pay for the good).Private goods are rival in consumption (only one person can consume the good), and excludable (it is possible to exclude a person who does not pay for the good).

6. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Public Goods Examples of public goods are: National defenseNational defense Law enforcementLaw enforcement Space explorationSpace exploration Preservation of endangered speciesPreservation of endangered species Protecting the earths ozone layerProtecting the earths ozone layer Income transfers to the poorIncome transfers to the poor

7. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Private Goods with Spillover Benefits A good such as education generates workplace and civic spillovers benefits, thus, the government should adopt policies to encourage people to become educated.A good such as education generates workplace and civic spillovers benefits, thus, the government should adopt policies to encourage people to become educated. Local governments provide free primary and secondary education. States subsidize higher education, and the federal government provides financial aid to students in private and public schools.Local governments provide free primary and secondary education. States subsidize higher education, and the federal government provides financial aid to students in private and public schools.

8. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Voluntary Contributions and the Free-Rider Problem The problem with using voluntary contributions to support public goods is the free-rider problem:The problem with using voluntary contributions to support public goods is the free-rider problem: Each person will try to get the benefit of a public good without paying for it, trying to get a free ride at the expense of others who do pay.Each person will try to get the benefit of a public good without paying for it, trying to get a free ride at the expense of others who do pay.

9. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Overcoming the Free-Rider Problem Techniques to encourage people to contribute:Techniques to encourage people to contribute: Give contributors something in returnGive contributors something in return Arrange matching contributionsArrange matching contributions Appeal to peoples sense of civic or moral responsibilityAppeal to peoples sense of civic or moral responsibility

10. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Tax Shifting: Forward and Backward A forward-shifted tax is a tax imposed on producers but passed on to consumers. The amount of a tax shifted forward depends on the price elasticity of demand for the taxed good.A forward-shifted tax is a tax imposed on producers but passed on to consumers. The amount of a tax shifted forward depends on the price elasticity of demand for the taxed good. A backward-shifted tax is a tax borne by firms and input suppliers. The amount of backward shifting to input suppliers depends on their responsiveness to changes in input prices.A backward-shifted tax is a tax borne by firms and input suppliers. The amount of backward shifting to input suppliers depends on their responsiveness to changes in input prices.

11. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Market Effects of an Apartment Tax In a competitive market, equilibrium price ($200) is just enough to cover the cost of providing an apartment.In a competitive market, equilibrium price ($200) is just enough to cover the cost of providing an apartment.

12. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Market Effects of an Apartment Tax A tax of $80 imposed on housing firms increases the average cost of providing 900 apartments by $80, to $280.A tax of $80 imposed on housing firms increases the average cost of providing 900 apartments by $80, to $280.

13. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Market Effects of an Apartment Tax The tax shifts the supply curve to the left.The tax shifts the supply curve to the left. At each price, fewer apartments will be supplied.At each price, fewer apartments will be supplied. The tax increases equilibrium price and decreases the output of the industry.The tax increases equilibrium price and decreases the output of the industry.

14. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Elasticities of Demand and Tax Effects When demand is relatively inelastic, the tax burden is forward-shifted. When demand is relatively elastic, the tax burden is backward-shifted.

15. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Tax Burden and Deadweight Loss Deadweight loss from taxation is the difference between the total burden of a tax and the amount of revenue collected by the government.Deadweight loss from taxation is the difference between the total burden of a tax and the amount of revenue collected by the government. Another name for deadweight loss is excess burden of a tax.Another name for deadweight loss is excess burden of a tax.

16. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Public Choice Public choice economics is a field of economics that explores how governments actually operate.Public choice economics is a field of economics that explores how governments actually operate. The public-interest view of government is based on the idea that governments make the economy more efficient.The public-interest view of government is based on the idea that governments make the economy more efficient.

17. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Voters Tell Governments What to Do The median-voter rule is a rule suggesting that the choices made by government will reflect the preferences of the median voter.The median-voter rule is a rule suggesting that the choices made by government will reflect the preferences of the median voter. In a democracy, the government takes actions that are approved by the majority of citizens.In a democracy, the government takes actions that are approved by the majority of citizens. If governments respond to voters, the voting public ultimately makes all the important decisions.If governments respond to voters, the voting public ultimately makes all the important decisions.

18. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Government Officials Pursue Their Own Self-Interest The Nobel Laureate James Buchanan, among others, has suggested a model of government that focuses on the selfish behavior of government officials.The Nobel Laureate James Buchanan, among others, has suggested a model of government that focuses on the selfish behavior of government officials. The self-interest theory of government suggests that voters dont have much information about the costs and benefits of public services, and may not be able to evaluate the actions of politicians.The self-interest theory of government suggests that voters dont have much information about the costs and benefits of public services, and may not be able to evaluate the actions of politicians. Limitations on taxes and spending are necessary safeguards against politicians and bureaucrats who benefit from large budgets.Limitations on taxes and spending are necessary safeguards against politicians and bureaucrats who benefit from large budgets.

19. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e OSullivan/Sheffrin Special-Interest Groups Manipulate the Government This model of government is based on the idea that small groups of people manipulate government for their own gain.This model of government is based on the idea that small groups of people manipulate government for their own gain. When a few people share the benefit from a project and a large number of people share the cost, government is more likely to approve inefficient projects.When a few people share the benefit from a project and a large number of people share the cost, government is more likely to approve inefficient projects. Special-interest groups form whenever the benefits are concentrated on a few citizens but costs are spread out over many citizens.Special-interest groups form whenever the benefits are concentrated on a few citizens but costs are spread out over many citizens.