ch 14 public goods and tax policy

government

only organization with the power to compel actions

public good

a good that is both nonrival and nonexcludable

nonrival good

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

• national defense, street light

non-excludable good

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

• over-the-air broadcasts

• fireworks displays

pure public good

both nonrival and nonexcludable

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

zero

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

collective good

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

• sometimes provided by government

pure private good

• non-payers can easily be excluded

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

pure commons good

rival good that is non-excludable

• results in a tragedy of the commons

• fish in open water

cost of public good

sum of the explicit and implicit costs incurred to produce it

highest price someone would pay

benefits of an additonal unit of a private good

sum of the reservation of all people who use it

benefits of an additional unit of a public good

head tax

tax that collects the same amount from every taxpayer

• majority of affected parties must agree

regressive tax

tax rate that varies inversely with income

proportional income tax

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

jointly consumed goods

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

higher income groups

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

progressive taxes

______ take a larger share of higher incomes as tax

advantages of government provision

• low cost to collect additional revenue

• expedient: no negotiations over distribution of costs

• only feasible provider for nonexcludable goods

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

two roles of government

• regulation of activities that generate externalities

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