topic 9 public goods and taxes

7/23/2019 Topic 9 Public Goods and Taxes

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MICROECONOMICS

Topic 9

Public Goods and Taxes


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Public Goods and Taxes

Introduction

The Different Kinds of Goods

The Use of Common Resources

Externalities Taxes


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The best things in life are free. . .

Most goods in our economy are allocated in

markets.

For these goods, prices are the signals that

guide the decisions of buyers and sellers.


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When goods are available free of charge, the

market forces that normally allocate resources

in our economy are absent.


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When a good does not have a price attached

to it, private markets cannot ensure that the

good is produced and consumed in the proper

amounts.


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In such cases, government policy can

potentially remedy the market failure that

results and raise economic well-being.


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The various goods in our economy may be

grouped by excludability and rivalness.


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Excludability

Property of a good

Refers to the possibility to prevent someonefrom enjoying the benefits of it.

Rivalry in consumption

Property of a good

Refers to goods, services or resources if itsuse by one person decreases the quantityavailable for someone else.

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Excludability:

Nonexcludable if it is virtually impossible toprevent someone from benefiting from it.

Fish in ocean

radio program national defense

street light

air quality Maintenance of dams and main canal in irrigationsystem.


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Four types of goods

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Rival in consumption?Yes No

Excludable?

Yes

Private goods

- Ice-cream cones

- Clothing

- Congested toll roads

Natural monopolies

- Fire protection

- Cable TV

- Uncongested toll roads

No

Common resources

- Fish in the ocean

- The environment

- Congested nontoll roads

Public goods

- Tornado system

- National defense

- Uncongested nontoll roads

Goods can be grouped into four categories according to two characteristics:

(1) A good is excludable if people can be prevented from using it.

(2) A good is rival in consumption if one persons use of the good diminishes other

peoples use of it.

This diagram gives examples of goods in each category.


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Types of goods

Private goods

Excludable & Rival in consumption

Public goods

Not excludable & Not rival in consumption

Common resources

Rival in consumption & Not excludable

Natural monopoly

Excludable & Not rival in consumption

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Private goods: Rival and excludable.

apple

my garden

my office

Public goods: Nonrival and nonexcludable.

national defense

law and order

street lights


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Common resources: Rival and nonexcludable. ocean fish

earths atmosphere

Natural monopolies: Nonrival but excludable. Uncongested bridge Uncongested cable TV

Uncongested internet

Uncongested electricity or phone grid


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Common Resources

Common resources

Not excludable

Rival in consumption

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The Free-Rider Problem

A free-rider is a person who receives the

benefit of a good but avoids paying for it.


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The Free-Rider Problem

Since people cannot be excluded from

enjoying the benefits of a public good,

individuals may withhold paying for the good

hoping that others will pay for it.

The free-rider problem prevents private

markets from supplying public goods.


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Solution to the Free-Rider Problem

The government should provide the good if its

total benefits exceed the costs.

The government can make everyone better off

by providing the good and paying for it with

tax revenue.


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Externalities

Goods that are not excludable and, therefore,

are available to everyone free of charge.

Externalities arise because something of

value has no price attached to it.

People receive benefits without having to

compensate anyone for the use of scarce

resources.


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Externalities

Externality:

a cost or benefit that arises from production and fallson someone other than the producer; or

A cost or benefit that arises from consumption andfalls on someone other than the consumer


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Externalities

Four (4) types of externalities:

Negative production externalities

Positive production externalities

Negative consumption externalities Positive consumption externalities


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Externalities

Negative production externality:

Those people who lives near the KLIA, Sepang sharea negative production externality from the noise of airplanes taking off from the international airport.

Logging and clearing of forests destroy the habitat ofwildlife and influence the amount of the carbondioxide in the atmostphere, which has a long termeffect on temperature.

Also includes water pollution and air pollution.


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Externalities

Positive production externality:

Your neighbor is a good gardener who keep hisgarden beautiful, everyone that sees the gardengets pleasure from it.

A composer composed a beautiful song, he enjoysthe royalty and we enjoy listen to the music.


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Externalities

Negative consumption externality:

Smoking in a confined space such as restaurant,airlines creates unpleasant fumes for other people(non-smoking) and pose a health risk.

Fun-seeking partygoers attend noisy party postexternal cost on sleep-seeking neighbors.


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Externalities

Positive consumption externality:

Flu medication generates positive consumptionexternality. How?

When you get a flu medication to cure yourrunning nose, you not only treat your problem, butalso prevent your neighbor/friends from getting it(from you).


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Externalities

Externality creates inefficiency due to:

Property rights your lazy neighbor ignore yourcomplaint about his untidy lawn.

To enjoy different types of goods/services producersproduced all kinds of products/services and ignore thepollution creates from the activity.


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Taxation and Government

For government to provide goods and services such

as national defense, social security, national parks,

etc. it must have money.

The Government raises money several ways includinguser fees and taxes.

User Fees are fees paid by those that use the good or

service: it is a price.

Taxes may be paid by everyone or only those that use

a good or service: who pays depends on the type of

tax.


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Taxes

Tax Tax is a compulsory contribution by individual/firm to

government

Comprises regular and periodical payments

Involves penalty for non-payment Types of tax revenue:

Direct taxes (companies income tax, individualsincome tax, petroleum income tax, property gain

tax) Indirect taxes (export duties, import duties, sales

tax, service tax)


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Types of Tax Revenue

Income tax -Generally the tax is imposed on netprofits from business, net gains, and other income.

Capital gains tax - Capital gain is generally gain on

sale of capital assets, i.e., those assets not held for salein the ordinary course of business. Capital assetsinclude personal assets

Corporate tax - Corporate tax refers to income,

capital, net worth, or other taxes imposed oncorporations.


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Taxes on goods and services:

Value added tax (Goods and Services Tax) -Avalue added tax (VAT), also known as Goods andServices Tax (G.S.T), applies the equivalent of a sales

tax to every operation that creates value.

Sales taxes - Sales taxes are levied when acommodity is sold to its final consumer. Retailorganizations contend that such taxes discourage

retail sales.


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Excises - Excise taxes are based on the quantity, notthe value, of product purchased.

Tariff -An import or export tariff (also called customsduty or impost) is a charge for the movement of goods

through a political border.


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Other Types of Tax Revenue

License fees - Occupational taxes or license fees maybe imposed on businesses or individuals engaged incertain businesses. Many jurisdictions impose a tax onvehicles.

Quick Rent

Road tax


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Types of Tax Rates

An important feature of tax systems is the percentage ofthe tax burden as it relates to income or consumption.

The terms progressive, regressive, and proportional are

used to describe the way the rate progresses from lowto high, from high to low, or proportionally.

The terms describe a distribution effect, which can beapplied to any type of tax system (income or

consumption) that meets the definition.


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Types of Tax Rates

A progressive tax is a tax imposed so that the effectivetax rate increases as the amount to which the rate isapplied increases.

The opposite of a progressive tax is a regressive tax,

where the effective tax rate decreases as the amount towhich the rate is applied increases. This effect iscommonly produced where means testing is used towithdraw tax allowances or state benefits.


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Types of Tax Rates

In between is a proportional tax, where the effectivetax rate is fixed, while the amount to which the rate isapplied increases.

A lump-sum tax is a tax that is a fixed amount, nomatter the change in circumstance of the taxed entity.This in actuality is a regressive tax as in actuality thosewith lover income must use higher percentage of theirincome than those with higher income and thereforethe effect of the tax reduces as a function of income.


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The End

Good Luck in your Final Examination!

topic 9 public goods and taxes

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