Unit 7: Public Spending Decisions Flashcards
Assuming equal shares between voters who are paying with a tax a tax to finance a public good. What is the total cost of the good?
C=ΣT(i) where T(i) is the cost to each voter, i
Given 3 voters with individual MB valuations of public spending on a public good. Draw a diagram to illustrate the level of public good they desire, and explain it? Where will the equilibrium fall in this example and why? Show on the diagram the: a) forgone benefit, and b) loss, that voters may experience?
See notes for diagram
Since they have different marginal benefits, then for the fixed cost, T, to each voter, they demand a different level of the public good
See notes for equilibrium (MVT holds, status quo selected)
See notes
just below the diagram
If there is an increase in the tax rate, and the voters have MBs at different gradients, what might happen? Illustrate this on a diagram?
There may be a change in the identity of the median voter! (see notes for diagram) (and obvs. a change in the eq. level unless MB is vertical)
Illustrate on a diagram how, if the tax rates rise for voter 2 and voter 3 but not voter 1, where T(3)>T(2), this might affect preferred level of PG for each person and how the median position could change?
See notes (bottom of side 1)
What can a change in the structure/volume of taxes therefore do?
Change the identity of the MV
The level of PG provided is not necessarily…
efficient or socially just
What gives the efficient supply/volume of PG provision?
MB=MC (to society)
Illustrate on a diagram that the MV does not necessarily choose efficient level of public spending? How might this be corrected?
See notes
Is corrected by reducing tax to T(L)=Lindahl tax share for the median voter; this aligns the interests of the median voter with that of society: see explanation in notes
Show that the median voter who happens to have the AVERAGE MB will choose the efficient level of PG spending?
See notes side 2
What is a common-pool problem?
A common-pool problem exists when everyone pays taxes, but a certain group (eg. the majority) determines the public spending in their OWN INTEREST
Give an example when the CPP occurs?
When the median voter determines public spending; they are the only one satisfied (and any who have same preferences as them) -> over-/under-supply of PGs
Note:
Majority voting/Condorcet winner do not necessarily lead to the selection of the most efficient outcome for Public Spending (see why slide 17?)
Which market failures in education suggest we should intervene in education market? (3)
Externalities (positive, eg. wider benefits of educated citizens)
Imperfect information (on benefits of education etc.)
Imperfect competition
Which social injustices in education suggest we should intervene in education market? (2)
Merit good argument
Horizontal and vertical equity considerations
Characteristics of education as a market good?
1) private good (ie. excludable)
2) Is a consumption and an investment good
3) Often publicly financed and publicly provided
4) Heavy regulated
5) Not (fully) chosen by final consumer
Explain why market failures in education leads to government intervention? (ie. why is it under-consumed in normal market? (2) and why cannot it be financed by individuals? (2…))
Positive externalities of education tf is under-consumed
Imperfect info on the benefits tf further under-consumed
- Individuals cannot finance own education since no income yet (at school still)
- Individuals cannot use own labour as collateral for a loan (slavery illegal)
THEREFORE FIs would charge too much compensation for an education loan since too risky
Therefore government must intervene to solve these issues!
Define a merit good?
A good that will be under-consumed without government intervention
What does the merit good argument justify for regarding gov. intervention in education?
Compulsion/regulation, but not necessarily entire public provision!
What is an argument for public provision of education?
‘an educated citizen is a better citizen’
What is redistribution?
Policy tool for goods that are needed proportionately most by the poor (eg. housing schemes)
NOTE: Redistribution motivation is often used as the main reason for the government to intervene in the education sector
Some people argue that education is a redistribution policy. Explain two drawbacks of education that actually mean it isn’t so great?
1) High cost to increase equity by a small amount (ineffective)
2) Education policy can be manipulated by certain groups(???)
Explain why some people argue that education is a redistribution motivation justifies public provision?
1) Asymmetrical info. evidence
2) Political acceptability
3) “an educated citizen is a better citizen”
