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Introduction: Principles of Public Finance

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Introduction: Principles of Public Finance

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    1. Introduction: Principles of Public Finance Lecture 1 August 30, 2005

    2. Government—What is it good for? Set common rules of behavior Protect citizens from external threats Pool resources for the common good Address and correct market failures

    4. Non-rival use: Once a good is provided for one consumer, the cost of supplying it to another consumer is zero. (Marginal cost = 0) Non-exclusion: Once a good is provided for one consumer all other consumers can use it—cost allocation is impossible. Free rider: A consumer who uses a benefit intended to promote certain behavior but who would have engaged in this behavior anyway.

    5. Externality: Effect of market transaction imposed on a “third party” (neither producer nor consumer of the transaction good). Positive: Third party receives benefits from transaction (vaccinations)—Hidden benefits: undersupply of good. Negative: Third party incurs costs from transaction (factory pollution emissions)—Hidden costs: oversupply of good.

    6. Criteria for undertaking government action Cost-benefit: Do benefits to society exceed costs? (No distribution considerations) Kaldor: Those benefiting could compensate losers. Pareto (optimal): Do at least some members of society benefit without any losing out? Majority rule (democracy): Do more members of society benefit than lose? Oligarchic (elite rule): Do those who control society benefit? Social justice (re-distributive): Do worse off members of society benefit?

    10. Calculation of Individual Share of Total Benefits and Benefit-Based Cost Share for Example 3 First, calculate the percent share of the total benefit for each individual:

    11. Calculation of Individual Share of Total Benefits and Benefit-Based Cost Share for Example 3 Next, calculate the benefit-based cost share for each individual:

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