Chapter 14 - Public goods & tax policy

Government provision of public goods

• Public good: good/service that, to at least some degree, is both non-rival and non-excludable.

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• Non-rival good: good whose consumption by one person does not diminish its availability for others.

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• Non-excludable good: good that is difficult, or costly, to exclude non-payers from consuming.

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• Pure public good: good/service that, to a high degree, is both non-rival and non-excludable.

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• Collective good: good/service that, to at least some degree, is non-rival but excludable.

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• Pure private good: one for which non-payers can easily be excluded and for which each unit consumed by one person means one less unit available for others.

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• Pure commons good: one for which non-payers cannot easily be excluded and for which each unit consumed by one person means one less unit available for others.

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• Head tax: tax that collects the same amount from every taxpayer.

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• Regressive tax: tax under which the proportion of income paid in taxes declines as income rises.

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• Proportional income tax: one under which all taxpayers pay the same proportion of their incomes in taxes.

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• Progressive tax: one in which the proportion of income paid in taxes rises as income rises.

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The optimal quantity of a public good

• Because the quantity of a public good must be the same for every consumer, the total demand curve for a public good is constructed by adding individual demand curves vertically. Optimal production of a public good occurs at the quantity for which the demand curve intersects the marginal cost curve for the public good.

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• Government need not always be the best way to provide public goods. Such goods can be provided by private organizations that rely on charitable contributions or the sale of by-products. Private for-profit companies also can become providers when new technologies such as pay-per-view television convert public goods into collective goods.

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Laws, regulations and the question of centralization

• Government creates economic surplus not only by providing public goods but also by regulating activities that generate externalities and by defining and enforcing property rights. These rationales explain why most governments regulate pollution, subsidize education, control access to fishing waters and public timberland, and enforce zoning laws.

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• Although the framers of the Constitution disliked centralized government power, they recognized that some government functions are not best performed at the local Or even state level. Economies of scale argue for provision of defense at the national level. Externalities that transcend local boundaries provide an additional rationale for national or even international government.

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• Pork barrel spending: public expenditure that is larger than the total benefit it creates but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes.

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• Logrolling: practice whereby legislators support one another's legislative proposals.

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• Rent-seeking: socially unproductive efforts of people or firms to win a prize.

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Why should we tax?

• Although the primary purpose of the tax system is to generate the revenue needed to fund public goods and other government expenditures, taxes also have many other consequences, some intended, others not.
  • For example, taxes alter the relative costs and benefits of engaging in different activities. They also affect the distribution of real purchasing power in the economy. The best tax system is one that raises the needed revenues while at the same time having the most beneficial, or least deleterious, side effects.

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• Crowding out: government borrowing that leads to higher interest rates, causing private firms to cancel planned investment projects (i.e., the tendency of increased government deficits to reduce investment spending).

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