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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 vs private goods
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
    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
    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
    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


    .

    .



    Types of taxes
    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?



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