Topic 9 Public Goods and Taxes
-
Upload
darrelyn-liew -
Category
Documents
-
view
215 -
download
0
Transcript of Topic 9 Public Goods and Taxes
-
7/23/2019 Topic 9 Public Goods and Taxes
1/35
MICROECONOMICS
Topic 9
Public Goods and Taxes
-
7/23/2019 Topic 9 Public Goods and Taxes
2/35
Public Goods and Taxes
Introduction
The Different Kinds of Goods
The Use of Common Resources
Externalities Taxes
-
7/23/2019 Topic 9 Public Goods and Taxes
3/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
4/35
The best things in life are free. . .
When goods are available free of charge, the
market forces that normally allocate resources
in our economy are absent.
-
7/23/2019 Topic 9 Public Goods and Taxes
5/35
The best things in life are free. . .
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
6/35
The best things in life are free. . .
In such cases, government policy can
potentially remedy the market failure that
results and raise economic well-being.
-
7/23/2019 Topic 9 Public Goods and Taxes
7/35
The Different Kinds of Goods
The various goods in our economy may be
grouped by excludability and rivalness.
-
7/23/2019 Topic 9 Public Goods and Taxes
8/35
The Different Kinds of Goods
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.
8
-
7/23/2019 Topic 9 Public Goods and Taxes
9/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
10/35
Four types of goods
1
10
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
11/35
The Different Kinds of Goods
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
11
-
7/23/2019 Topic 9 Public Goods and Taxes
12/35
The Different Kinds of Goods
Private goods: Rival and excludable.
apple
my garden
my office
Public goods: Nonrival and nonexcludable.
national defense
law and order
street lights
-
7/23/2019 Topic 9 Public Goods and Taxes
13/35
The Different Kinds of Goods
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
-
7/23/2019 Topic 9 Public Goods and Taxes
14/35
Common Resources
Common resources
Not excludable
Rival in consumption
14
-
7/23/2019 Topic 9 Public Goods and Taxes
15/35
The Free-Rider Problem
A free-rider is a person who receives the
benefit of a good but avoids paying for it.
-
7/23/2019 Topic 9 Public Goods and Taxes
16/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
17/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
18/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
19/35
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
-
7/23/2019 Topic 9 Public Goods and Taxes
20/35
Externalities
Four (4) types of externalities:
Negative production externalities
Positive production externalities
Negative consumption externalities Positive consumption externalities
-
7/23/2019 Topic 9 Public Goods and Taxes
21/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
22/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
23/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
24/35
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).
-
7/23/2019 Topic 9 Public Goods and Taxes
25/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
26/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
27/35
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)
-
7/23/2019 Topic 9 Public Goods and Taxes
28/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
29/35
Types of Tax Revenue
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
30/35
Types of Tax Revenue
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
31/35
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
-
7/23/2019 Topic 9 Public Goods and Taxes
32/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
33/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
34/35
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.
-
7/23/2019 Topic 9 Public Goods and Taxes
35/35
The End
Good Luck in your Final Examination!