Public goods Flashcards
How do you distinguish between a public and private good?
Depends on whether they are rivalrous and are excludable.
What is a rivalrous good?
When someone is using and benefitting from a good, it effects someone else’s use of the good.
What is an example of a rivalrous good?
A pen
What is excludability?
When there is a mechanism in place to prevent non payers from using and benefitting from the good.
What is a private good?
Rivalrous and excludable
What is a public good?
Non-rivalrous and non excludable
Are there any exceptions?
Yes, a park bench: non excludable and rivalrous.
Or a tv signal, non rivalrous but excludible
Why are public goods non excludable?
- You can’t tell who is benefitting from a good or by how much
- Its costly to have a mechanism to make people pay
- The MC of another person using the good is 0
What does the non excludability of public goods create?
The free riders problem.
What is the free rider problem?
People use things they’re not paying for.
How are public goods a market failure?
Because of the free rider problem, if public goods were left to the free market, firms would not produce them because their goal is to maximise profits. This leads to market failure.
What is the solution to the market failure of public goods?
The taxpayers pay for them (government intervention)
How should a public good be provided?
By the government with a voluntary agreement
What is a voluntary agreement?
Members of a community all chip in to pay for a public good.
It also can’t have too many free riders. So the people who pay for the good must cover the cost.
How does the government decide to provide a public good?
Using cost-benefit analysis (similar to marginal analysis)
Under what circumstances will the government provide a public good?
If MSB > MSC
How do you calculate marginal social cost?
Its just the price
How do you calculate the market demand curve?
Horizontal summation of individual demand curves at each price level
How do you calculate the MSB?
Vertical summation of MPB. Add up all of MPB at a certain quantity because MPB is willingness to pay.
What are the types of government spending?
Exhaustive expenditures
Transfer Payments
What are exhaustive expenditures?
Gov purchases of goods and services for consumption, making these goods and services no longer available for private use.
What are transfer payments?
A way of redistribution of income, transfers fund from one individual or organisation to another.
Do transfer payments change the amount of goods and services that are consumed by the government?
No
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What is the main source of government revenue?
Taxation
What do people think of taxes?
That they’re too high
What is the benefit received principle?
If you receive benefit, you have to pay. If you don’t receive benefit, you don’t pay.
What is an example of the benefit received principle?
Taxes on gas to pay for roads
Negatives of the benefit received principle?
If you make people who get government welfare pay for it, you defeat the purpose of the government service
Positives of the benefit received principle?
People are motivated to pay taxes for a good they benefit directly from.
Doesn’t result in one person receiving benefits at the expense of another person.
What is the ability to pay principle?
If you can pay, you do
What kind of equity is there with the ability to pay principle?
Horizontal equity and vertical equity
What is vertical equity with the ability to pay principle?
Those who can pay more, pay more taxes
What is horizontal equity with the ability to pay principle?
Those who can pay the same, pay the same.
What is the incidence of taxation and how is it decided?
Who pays the tax and it’s decided on by externalities.
Why are taxes inefficient?
There is DWL and people alter their behavious (consumers consume less, producers produce less, workers want to work less)
What are neutral taxes?
Taxes that don’t make people change their behaviour
What is an example of a neutral tax?
Thatcher’s poll tax - all adults pay the same amount of tax.
What is a marginal tax rate?
Extra tax you have to pay when your income goes up by one.
What is average tax rate?
Percentage of income paid in tax
What is taxable income?
Income left over when you remove tax exemptions (e.g. donations, education)
What does taxable income encourage?
Donations
What is disposable income?
Income left over after taxes, goes to saving or consumption.
What is indexing taxes for inflation?
Individuals who’s earnings have been raised by inflation are pushed into higher tax brackets meaning their real income after taxes can be reduced (value of disposable income decreases), so you tie tax rates to inflation.
What is government deficit?
Expenditure > revenue, they spend more than they receive
What is government surplus?
Revenue > expenditure
What is budget balance?
When revenue = expenditure
What is government debt?
Cumulative deficits over years.
What is servicing the debt?
Paying the interest rate on the debt
What are bonds?
Safe and secure
How does the government pay for things?
Buying and selling bonds
How do the government get people to buy bonds?
By increasing the interest rate.
In terms of GDP what do transfer payments count for?
Can count as C (consumer spending) or G (government spending)
In terms of GDP what does exhaustive expenditure count for?
Just G
What could transfer payments lead to?
Double counting problem
How can you solve the double counting problem?
Value added (output - input)
