Public Goods, Taxes

1
Public Goods, Taxes Income Distribution

• Chapter 11

2
2 KINDS OF 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
3
Public Good Efficiency

• When goods are available free of charge gt 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

4
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

5
Types of Taxes

• Progressive Tax-
• Income ? gt Average Tax Rate ?
• Example U.S. Federal Income Tax
• Regressive Tax-
• Income ? gt Average Tax Rate ?
• Example Sales Tax, Gasoline Tax, Bridge Tax
• Proportional Tax
• Income ? or ? gt 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?
6
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
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

8
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

9
U.S. Gini Index Comparison

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

10
Worksheets

• What is a Fair Tax
• Worksheet A Who pays the most Taxes

11
Tax Cut Controversy