Public Goods

1
Public Goods
and
Taxes
2
Government Intervention

• Monopoly
• Externalities
• Economic inequality
• Public goods

3
Public Goods

• a good or service that can be consumed
  simultaneously by everyone and from which no one
  can be excluded.
• Nonrivalry
• The consumption by one person does not decrease
  the consumption by another.
• Nonexcludable
• It is impossible, or extremely costly, to prevent
  someone from benefiting from a good.

4
Public Goods and Private Goods
5
Public Goods

• A free rider is a person who consumes a good
  without paying for it.

6
Public Good
Lisa's Marginal Benefit
Max's Marginal Benefit
80
80
Marginal benefit (dollars per acid-rain check)
Marginal benefit (dollars per acid-rain check)
60
60
40
40
20
20
0
0
3
4
5
1
2
1
2
3
4
5
Quantity (number of acid-rain checks)
Quantity (number of acid-rain checks)
7
Public Good
80
70
Economy's Marginal Benefit For A Private Good
Marginal benefit (dollars per acid-rain check)
60
50
40
30
20
0
1
2
3
4
5
6
7
8
Quantity (number of acid-rain checks)
8
Benefits of a Public Good
140
120
Economy's Marginal Benefit
Marginal benefit (dollars per acid-rain check)
100
80
60
40
20
0
1
2
3
4
5
Quantity (number of acid-rain checks)
9
The Efficient Quantity of a Public Good
Marginal cost (billions of dollars per acid-rain
check)
Marginal benefit (billions of dollars per
acid-rain check)
Total cost (billions of dollars)
Total benefit (billions of dollars)
Net benefit (billions of dollars)
Quantity (number of acid-rain checks
0 1 2 3 4 5
0 2.0 3.5 4.5 5.0 5.0
0 0.5 1.5 3.0 5.0 7.5
0 1.5 2.0 1.5 0 -2.5
10
The Efficient Quantity of a Public Good
Total Benefit Total Cost
Marginal Benefit Marginal Cost
7.5
2.0
5.0
Total benefit and total cost (billions of
dollars)
Marginal benefit (billions of dollars per
acid-rain check)
M
3.5
1.0
1.5
0
1
2
3
4
0
1
2
3
4
5
5
Quantity (number of acid-rain checks)
Quantity (number of acid-rain checks)
11
Bureaucratic Overprovision
TC
7.5
5.0
TB
3.5
Total benefit and total cost (billions of dollars)
1.5
0
1
2
3
4
5
Quantity (number of acid-rain checks)
12
Two Types of Political Equilibrium

• Public Interest Theory
• governments make choices that achieve efficiency.
• fully informed voters
• Public Choice Theory
• governments make choices that result in
  inefficiency.
• rationally ignorant voters

13
Taxes

• Progressive tax
• Tax rate increases as income increases
• Regressive tax
• Tax rate decreases as income increases
• Proportional tax
• Tax rate stays the same as income increases

14
Government Tax Revenues
Tax revenue (billions of dollars)
Income taxes
Provincial sales taxes and GST
Property taxes
Employment insurance taxes
Excise taxes
0 20 40 60
Percent of total taxes
15
The Effects of Income Taxes
LS
Lowest income tax rate
10.00
Wage rate (dollars per hour)
9.00
7.50
LD
0
30
40
50
36
Labour (hours per week)
16
The Effects of Income Taxes
LS
Highest income tax rate
200
Wage rate (dollars per hour)
170
LD
100
30
40
50
32
0
Labour (hours per week)
17
Taxes

• Provincial sales taxes and the GST
• Regressive tax
• Property tax
• Used to provide local goods
• Employment Insurance Taxes
• Paid by employees and employers to provide
  unemployment compensation benefits

18
Employment Insurance Tax
LS
Tax on employees
WC
Wage rate (dollars per hour)
W
WT
LD
QL0
QL
Labour (hours per week)
19
Employment Insurance Tax
LS
Tax on employers
WC
Wage rate (dollars per hour)
W
WT
LD
QL
QL0
Labour (hours per week)
20
Taxes

• Excise tax
• a tax on the sale of a particular commodity.

21
An Excise Tax
Price (cents per litre)
55
S
30
25
D
0
200
300
400
500
100
Quantity (millions of litres per day)
22
Why We Dont Tax Orange Juice
65
Price (cents per litre)
S
30
20
D
0
200
300
400
500
100
Quantity (millions of litres per day)