Addressing externalities

1
Public Policy
Chpt 19

• Addressing externalities
• Providing public goods, maintaining common
  resources
• Taxes, poverty, income redistribution

Chpt 20
Chpt 21
2
Producer and Consumer Surplus

• Efficient if there are no market failures.

3

• An excise tax creates deadweight loss
  (inefficiency).

Excise Tax
Price Quantity
3
4

• If demand is more elastic

Excise Tax
5

• smaller price change but greater deadweight loss

Excise Tax
Price Quantity
3
6
Equity in Taxes
Benefits Principle
Ability-to-Pay Principle
7
Equity vs. Efficiency
Rent control
Free parking at Regis
Income tax?
Lump-sum tax vs. Property tax

• Do high marginal tax rates discourage productive
  activity?

8
Progressive Regressive Taxes
Average tax rate Marginal tax rate
Average tax rate Marginal tax rate
9
Progressive Regressive Taxes
Average tax rate Marginal tax rate
Average tax rate Marginal tax rate