378 chapter 14 taxing and spending five people ae are

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Unformatted text preview: assed in Congress. Why? Let’s look at the following example. 378 Chapter 14 Taxing and Spending Five people, A–E, are represented in the table above. Suppose these people are considering buying a statue for their town square, the total cost of which is $500. They have agreed that if they decide to buy the statue, they will split the cost equally, each member paying $100. Now, they take a vote on whether or not to buy the statue. How will each person vote? Each person has to compare his or her personal benefits from the statue to the personal costs. In this case, their costs are all the same—$100. But to determine the benefits, each person must place a dollar value on what he or she thinks the benefits are worth. This dollar amount is essentially what the person is willing to pay for the statue. If the person’s benefits are greater than the costs, the person will vote yes for the statue; if the person’s benefits are less than the costs, the person will vote no. As you can see in the table, persons A, B, and C vote yes for the statue because for each of them the benefits are greater than the costs. Persons D and E vote no because for them benefits are less than costs—they don’t believe they will receive $100 worth of benefits from the statue. More yes votes (3) than no votes (2) means the community of five persons buys the statue. Notice one thing, however: the total benefits to the community of five persons is less than the total cost to the community of five persons. Even though the total benefits ($412) are less than the total costs ($500), the community buys the statue. On a personal level, you would never buy anything if the total benefits to you were less than the total costs. However, the government buys things every day where the total benefits are less than the costs, because government decides whether something will be bought based on voting. And voting, as we showed, can lead to things being bought even though the total benefits of something are less than the total costs. 14 (364-389) EMC Chap 14 11/18/05 10:59 AM ? Would We All Be Better Off Without Show-Offs? T horstein Veblen (1857–1929), an economist, believed that people sometimes buy goods for the wrong reasons. He coined the term conspicuous consumption—that is, purchasing designed to show off or to display one’s status. Consider the fact that today you can buy several different makes of watches, two of which are a Timex and a Rolex. A Timex costs under $100, and a Rolex costs many thousands of dollars. Both brands of watches keep good time, but the Rolex does something else: it “says” that you have the money to buy something expensive. In other words, a Rolex is a status symbol. In 2005, Tom Cruise and Katie Holmes, both movie actors, got engaged (to be married). Tom Cruise gave Katie Holmes a 4-carat diamond engagement ring. Cost: $200,000. Does our culture today promote status? Some economists believe that it does. The race for status, these economists contend, is a relative race and is wasteful. Some economists argue that t...
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