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Public Goods & Taxes. Chapter 11. 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.
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Public Goods & Taxes Chapter 11
Public vs. Private Goods • Public Goods • Goods that are neitherexcludable nor rival in consumption • Private Goods • Goods that are bothexcludable & rival in consumption Excludable-consumer who can not pay are excluded Rival-consumption by one reduces quantity for others Public Goods examples: clean air, police protection, radio signals, national defense Private Goods: Food, Coffee, airline tickets, automobiles, etc…
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 for neighborhood cleanup • Fundraising for Fire Department
Public Good Efficiency • When goods are available free of charge => market forces will not allocate resources efficiently • Government should collect taxes & provide public goods wheneverTotal Benefits≥Total Costs • Examples: • National Defense • Basic Research • Fighting Poverty • Fireworks on 4th of July
Tragedy of the Commons • Common Resources – “commonly” owned resources • rival in consumption but non-excludable • Example: fish in ocean, the environment • Tragedy of the Commons-the absence of incentives to prevent “overuse” & depletion of a common resource
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Types of Taxes • Progressive Tax- • Income ↑ => Average Tax Rate ↑ • Example:U.S. Federal Income Tax • Regressive Tax- • Income ↑ => Average Tax Rate ↓ • Example: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?
} Tax Brackets Progressive Income Tax Example: If you Earn $100,000 ($ 7,000 - 0 ) x 10% = $700 (28,400 - 7,000 ) x 15% = 3,210 (68,800 - 28,400 ) x .25 % = 10,100 (100,000 - 68,800 ) x .28% = 8,736 Total: $ 22,746 Actual Tax Rate: 22.7%
Top 1% pay more taxes but The income Gap has widened last 30-Years
EQUAL % tax cuts What best stimulates economic growth?
