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CHAPTER THIRTY-ONE PUBLIC CHOICE THEORY AND TAXATION INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Explain the problems created with majority voting and the median-voter outcome. 2. State four reasons given by public choice theorists for government’s inefficiency in providing public goods and services. 3. Differentiate between the benefits-received and ability-to-pay principles of taxation. 4. Identify which taxes are progressive, proportional, and regressive. 5. Describe how elasticities of demand and supply are related to the incidence of a sales or excise tax. 6. Explain the relationship between the elasticities of demand and supply and the efficiency loss of a particular tax. 7. Describe the probable incidence of the personal income tax, corporate income tax, sales and excise taxes, and property tax. 8. Relate the results of studies with regard to the effect of the U.S. tax and transfer systems on income distribution. 9. Identify three major provisions of the Deficit Reduction Act of 1993. 10. Explain the value-added tax and why some proponents favor it in place of the corporate income tax. 11. Define and identify the terms and concepts listed at end of the chapter. LECTURE NOTES I. Introduction A. In the last chapter we examined some examples of market failure in the private sector and the government policies designed to remedy them. This chapter examines more closely the public sector. B. The public sector elicits much disenchantment for its failures. This chapter examines some of these difficulties. 1. There is the difficulty of measuring society’s preferences in a majority voting system. 2. Government failures result from certain characteristics of the public sector. 3. “Public choice theory” is the economic analysis of government decision making that helps us to understand public sector problems. C. Public finance—the study of public expenditures and revenues—is briefly reviewed in this chapter as well. II. Revealing society’s preferences through majority voting is the way collective decisions are made in a democracy. 387
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Public Choice Theory and Taxation A. Majority voting can lead to inefficient outcomes ; that is, the majority can defeat a proposal that would have provided greater benefits than costs and adopt one that costs more than the benefits it provides (Figure 31-1). 1. Illustration of an inefficient “no” vote result: Suppose there are 3 voters who each will have to pay $300 in tax if a proposal is adopted. It is worth $700 to one, $250 to the second and $200 to the third. The second and third voters will vote “no” and defeat the proposal despite the fact that the total benefits ($1150) exceed the $900 cost . tax$
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