EC 201 11-24-08 - d o Public good all get same Q but...

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EC 201 11-24-08 Externalities: negative private mkt. will produce too much – but externalities can be positive o Private mkt. will produce too little o →govt. role: produce more Subsidy Direct provision by govt. Fireworks show o 1. Many can enjoy at same time, w/o ↓ others enjoyment “non-rival consumption” For private goods, consumption is rival o 2. Difficult to exclude those who don’t pay “nonexclusion” “nonexclusivity” o Nonrival cons. + nonexcludable cons. Are characteristics of “public good” o Other examples: national defense( pure public good)- police-fire(not pure) – education especially elementary Some argument for public provision or support W. extreme nonexclusion, private markets will fail What is optimal amt. of public good? o Q: Social MB, Social MC How to measure SMB? o Private good: mkt. D is horizontal sum of indiv. D curves o All faces same P, choose different Q
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Unformatted text preview: d o Public good: all get same Q , but different people have different willingness to pay WTP o →to get social WTP curve, sum individual WTP curves vertically o But nonexclusivity →people don’t reveal preferences accurately o Must rely on political processes for public goods • Must pay for govt. expenditures o Confiscation o Inflation o Debt o (govt. issues bonds →interest payments →future taxes o **taxes Good characteristic of “good” tax system (all else equal): • 1. Raise revenue • 2. Low costs of administration (fed: internal revenue service, state: Mich. Revenue) + compliance (individual taxpayers, tax accountants) • US individual income tax has high compliance costs(complicated) o ~5% of revenues o Payroll tax: flat tax on labor earnings, no deductions, low compliance costs...
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EC 201 11-24-08 - d o Public good all get same Q but...

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