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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
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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?

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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%

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Top 1% pay more taxes but

The income Gap has widened last

30-Years

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EQUAL % tax cuts

What best stimulates economic growth?

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