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Chap_16 - Chapter 16 Public Goods and Tax Policy Purpose...

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Chapter 16 Public Goods and Tax Policy Purpose : This chapter deals with the role of government as a producer of goods and services. It shows how microeconomic concepts can help answer the questions posed in the sixth full paragraph How big … should government be? 1. What goods and services should it provide? 2. How should it raise the revenue to pay for them? 3. What other powers should [government] have to constrain the behavior of its citizens? 4. How should the various powers … be apportioned among local, state, and federal levels? Length : 24 pages Time required to read : One and one-half hours. The narrative is easily understood because it deals with problems that are familiar to the students. Several definitions are not intuitive and may require additional time. The examples and exercises are not difficult. Lectures required for understanding : The materials can be covered in 1 ½ lectures. However, the chapter deals with topics that are of critical importance. Some aspects of these issues appear in every election at every level of government. This warrants additional class time for examples and discussion. Summary The chapter opens by restating the coercive powers of government: the government can force things to happen. The question, “How much force should be employed?” is always present and answering this question helps define the “correct” size of government. There are serious differences of opinion regarding the correct size. Adding more services and functions increases the size of government, and size can be reduced only by eliminating some services already in the bundle. Economics can help analyze these problems and opportunities.
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Definitions are required since the majority of goods and services produced by governments have qualities that are different from goods and services provided by the private sector. The characteristics of the goods helps determine how consumers will pay for them. A direct fee-for- service is seldom possible due to the public nature of the good being bought and sold. Two major qualities – rival/nonrival and excludable/nonexcludable – form measuring sticks that define and describe public goods. The nonrival characteristics of the goods help define a demand curve for products that are not exhausted by the consumers who use them. The demand curve for nonrival public goods is developed by vertically summing the demand curves of individuals. The vertical summation yields a curve that shows the collective willingness-to-pay for each quantity of the good or service that the government offers. The chapter shows that many goods that have public good characteristics can be and are provided by private individuals and companies. This often requires limiting or altering the nature of the good or service. The government may define additional property characteristics in an effort to remove or deal with externalities. It may also take steps to determine what level of government (local, state, or federal) can provide the good or service most efficiently.
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