1. Public Goods, Taxes & Income Distribution
Chapter 11

2. 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: clean air, police protection, radio signals, national defense
Private Goods: Food, Coffee, airline tickets

3. 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 money for neighborhood cleanup
Fundraising for Fire Department

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

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

6. 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: Sales Tax, 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?

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

8. Income Distribution & Lorenz Curve
Egalitarian Society- equal society
How to best measure Inequality:
Average Income:
incomplete measure
often inaccurate
Distribution of Income
more precise measure of inequality
Lorenz Curve illustrates income
distribution

9. Gini Index Summary
Measures the distance from line of “perfect equality” to Lorenz Curve
Gini Index ranges from Zero to 1
An index of 0 (zero) means perfect EQUALITY (on line)
As the Gini Index moves from 0  1 inequality increases

10. Practice Test: Public Goods

11. U.S. Gini Index Comparison
U.S.A
Japan .26
Germany .32
France .33
Bolivia .58
Brazil .59

12. Tax Cut Controversy