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Chapter 14 Section 1 Public Goods and Taxation

Chapter 14 Section 1 Public Goods and Taxation. Public Goods The Demand for Public Goods A public good is different b/c it is nonrival in consumption. A public good is available to all consumers in an identical amount. Ex. Spray the neighborhood for mosquitos.

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Chapter 14 Section 1 Public Goods and Taxation

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  1. Chapter 14 Section 1Public Goods and Taxation • Public Goods • The Demand for Public Goods • A public good is different b/c it is nonrival in consumption. • A public good is available to all consumers in an identical amount. • Ex. Spray the neighborhood for mosquitos. • Neighbors value that public good differently, but the same quantity is available to each.

  2. Optimal Quantity of the Public Good • Lets say it cost $15 and hour to spray for mosquitos. • The efficient level of the public good is found where the sum of the marginal benefits equals the marginal cost of providing the good.

  3. Benefits-received tax principle • Those who receive more benefits form the government program funded by a tax should pay more of that tax.

  4. Ability-to-pay tax principle • Those w/ a greater ability to pay, such as those w/ a higher income, should pay more of a tax.

  5. Other Revenue Issues • 1. Aid from higher levels of government • 2. User fees, such as highway tolls • 3. Fines, such as speeding tickets; and in some states • 4. Monopoly profits from having exclusive right to sell certain goods, such as lottery tickets and liquor. • If revenues fall short of expenditures, governments cover the resulting deficit by borrowing from the public.

  6. continued • Tax incidence-Indicates who actually bears the burden of a tax. • Proportional taxation-The tax as a percentage of income remains constant as income increases; (Flat tax) • Progressive taxation-The tax as a percentage of income increases as income increases. • Regressive taxation-The tax as a percentage of income decreases as income increase.

  7. Marginal Tax Rate • Indicates the percentage of each additional dollar of a taxpayers income that goes to taxes. • Pollution Taxes and Sin Taxes • Ex. Pollution emissions; fines for littering, disturbing the peace, & defective muffler • Ex. Sin tax on cigarettes, liquor, & legal gambling.

  8. User Fees • State charge entrance fee to state parks & tuition to state colleges.

  9. Borrowing • Governments sometimes borrow from households and firms to fund public programs. • Investments highways, airports, & schools.

  10. Chapter 14 Section 2 Federal, State, and Local Budgets • U.S. – federal system of government, responsibilities are shared across levels of government. • State govn’ts grant some powers to local governments and surrender some powers to the national, or federal, government. • Federal government has assumed primary responsibility for national security and the stability of the economy. • State govn’t fund public higher educations

  11. Government budget • A plan for government outlay’s and revenues for a specified period, usually a year.

  12. Federal Revenue • 1st century-the federal govn’t raised most of its revenue from taxes on imports, taxes on specific goods, and property taxes. • 16th Amendment allowed to levy personal income tax. • Primary source of federal revenue.

  13. Payroll taxes • Taxes deducted from paychecks to support Social Security and Medicare. • FICA-Federal Insurance Contributions Act. • Most years the federal government spends more than it takes in and makes up the difference by borrowing.

  14. State Budgets • State roads, visit state parks, state colleges. • Regulate age to get driver’s license • Speed • How many days school is in session. • Excise taxes- gasoline, movie tickets. • Paycheck, state income taxes.

  15. Composition of State Spending. Administration & interest 6% Police and prisons 5% Highways 6% Higher education 14% Other spending 15% Aid to local government 34% Welfare 20% Composition of State Spending and SpendingPg.441

  16. Composition of State Revenue • Individual income tax 19% • Corporate income tax 3% • User charges 17% • Other revenue 8% • Federal aid 28% • States and excise taxes 25%

  17. Local Budgets • Public schools, decide school hours • Roads maintained, local police • Sidewalks • Library

  18. Local Spending • Education • Police and fire protection.

  19. Local Revenue • State and federal aid make up 40%

  20. Relative Size and Growth of Government • An international comparison-

  21. Ch.14 s.3 Economics of Public Choice • Maximizing political support- Objective assumed to guide the behavior of elected official ; comparable to profit maximization by households.

  22. Representative Democracy • Federal government relies on a system of checks of balances to limit the executive, legislative and judicial. • Federal executive branch (president)-agencies bureaus work at cross purpose. Ex. U.S. Surgeon General has required warning outside of the cigarette. At the same time, subsidizing tobacco farms

  23. Role of Special Interest • Wool production is subsidize by U.S. government. • Special interest groups expend abundant resources to secure these advantages • Political Actions Committees-PACs contribute millions to congressional campaigns. 4,000 PACs try to shape federal legislation. • Top contributors-tobacco companies (fear reforms that would limit liability), American Trial Lawyers Association.

  24. Rational Ignorance • Unless voters have a special interest in a legislation, they adopt a stance of rational ignorance. • Rational Ignorance- A stance adopted by voters when they find that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so.

  25. Bureaus Versus Firms • Bureaus-government agencies charged with implementing legislation and financed through legislative bodies. • FBI, FDA, FCC, EPA, the Pentagon, your state’s department of motor vehicles, and your public school system.

  26. Voluntary Exchange • Market exchange relies on the voluntary behavior of buyers and sellers making private choices. • Any voting rule except for unanimous consent will involve some government influence. Citizens must pay taxes even when they object to a rule.

  27. Voter Incentives • Voters can move. • If a voter is unsatisfied with the federal government they cannot move. • A bureau does not know the publics preference they do not necessarily go out of business. • Inefficient bureaus get funded and waste resources indefinitely. Less pressure to minimize costs. • Private firms are more efficient so they may earn a profit.

  28. Private Versus Public Production • Just because some goods and services are financed by the government doe not mean they must be produced by the government. • Contract public output- garbage collection, fire protection for prisons to schools. • Pentagon hires and trains military personal. It contracts private firms to develop & produce weapons.

  29. Private Versus Public continued • When govn’ts produce public goods and services, they are using the internal organization of the government-the bureaucracy-to supply the product. • When govn’ts contract with private firms to produce public goods and services, they are using the market to supply the product.

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