Public Goods Taxes Income Distribution Chapter 11 Public

Public Goods, Taxes & Income Distribution 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 Rival- consumption by one reduces quantity for others Public Goods: clean air, police protection, radio signals, national defense Private Goods: Food, Coffee, airline tickets

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 money for neighborhood cleanup – Fundraising for Fire Department

Public Good Efficiency • When goods are available free of charge => market forces will not allocate resources efficiently • Government should collect taxes & provide public goods when: – Total Benefits ≥ Total Costs • Examples: – National Defense – Basic Research – Fighting Poverty – Fireworks on 4 th of July

Tragedy of the Commons • Common Resources – “commonly” owned resources – rival in consumption but nonexcludable – 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 • Progressive Tax– Income ↑ => Average Tax Rate ↑ – Example: U. S. Federal Income Tax • Regressive Tax– Income ↑ => Average Tax Rate ↓ – Example: Sales Tax, Gasoline Tax, Bridge Tax Incidence: Who Pays? • 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)

Progressive Income Tax } Tax Brackets 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%

Income Distribution & Lorenz Curve Egalitarian Society- equal society How to best measure Inequality: • Average Income: • incomplete measure • often inaccurate • Distribution of Income • more precise measure of inequality • Lorenz Curve illustrates income distribution

Gini Index Summary • • Measures the distance from line of “perfect equality” to Lorenz Curve Gini Index ranges from Zero to 1 An index of 0 (zero) means perfect EQUALITY (on line) As the Gini Index moves from 0 1 inequality increases

Practice Test: Public Goods

U. S. Gini Index Comparison • U. S. A. . 46 • • • . 26. 32. 33. 58. 59 Japan Germany France Bolivia Brazil

Tax Cut Controversy