ch 14 public goods and tax policy

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22 Terms

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government

only organization with the power to compel actions

2
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public good

a good that is both nonrival and nonexcludable

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nonrival good

one whose consumption by one person does not diminish its availability to others

  • national defense, street light

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non-excludable good

one that is difficult or costly to exclude non-payers from consuming

  • over-the-air broadcasts

  • fireworks displays

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pure public good

both nonrival and nonexcludable

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free-rider problem

not everyone will pay their share if they can get something for free

  • if a good is non-excludable, it is hard to make everyone pay

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zero

marginal cost of public goods is _____ due to non-rivarly

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collective good

a good or service that, to some degree, is nonrival but excludable

  • sometimes provided by government

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pure private good

  • non-payers can easily be excluded

  • each unit consumed by one person means one less unit available for others

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pure commons good

rival good that is non-excludable

  • results in a tragedy of the commons

  • fish in open water

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cost of public good

sum of the explicit and implicit costs incurred to produce it

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highest price someone would pay

benefits of an additonal unit of a private good

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sum of the reservation of all people who use it

benefits of an additional unit of a public good

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head tax

tax that collects the same amount from every taxpayer

  • majority of affected parties must agree

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regressive tax

tax rate that varies inversely with income

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proportional income tax

requires all taxpayers to pay the same proportion of their incomes in taxes

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jointly consumed goods

_____ must be provided in the same quantity and quality for all

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higher income groups

______ will not the get the amount of public goods they demand

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progressive taxes

______ take a larger share of higher incomes as tax

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advantages of government provision

  • low cost to collect additional revenue

  • expedient: no negotiations over distribution of costs

  • only feasible provider for nonexcludable goods

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disadvantages of government provision

  • one-size-fits-all

    • some pay for goods they don’t want

    • some don’t get goods they would pay for

  • taxation is coercive

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two roles of government

  • regulation of activities that generate externalities

  • defining and enforcing property rights that allows private markets to function