Econ chapters 10-12
external cost
(neg externalities) The ideal corrective tax =
external benefit
(pos externalities) the ideal corrective subsidy =
Examples of Negative Externalities
-Air pollution from a factory -The neighbor's barking dog -Late-night stereo blasting from the dorm room next to yours -Noise pollution from construction projects -Health risk to others from secondhand smoke -Talking on cell phone while driving
Examples of positive externalities
-Being vaccinated -R&D creates knowledge others can use -People going to college to raise population's education level, which reduces crime and improves government
administrative burden
-Includes the time and money people spend to comply with tax laws -Encourages the expenditure of resources on legal tax avoidance -Could be reduced if the tax code were simplified but would require removing loopholes, politically difficult -filing ones own taxes is really hard
types of private solutions to externalities
-Moral codes and social sanctions -Charities -Contracts between market participants and the affected bystanders
Policy options to prevent overconsumption of common resources
-Regulate use of the resources -Impose a corrective tax to internalize the externality (Ex. hunting and fishing licenses, entrance fees for congested national parks) -Auction off permits allowing use of the resources (Ex. spectrum auctions by the US federal communications commission) -If the resource is land, convert to a private good by dividing and selling parcels to individuals
ideal marriage tax/subsidy system
-Two married couples with the same total income pay the same tax -Marital status does not affect a couple's tax bill -A person/ family with no income pays no taxes -High-income taxpayers pay a higher fraction of their incomes than low-income taxpayers
Corrective taxes & subsidies
-align private incentives with society's interests -make private decision-makers take into account the external costs and benefits of their actions -move economy toward a more efficient allocation of resources
Why private solutions do not always work
1. transaction costs 2. stubbornness 3. Coordination problems
Equity
= everybody pays their fair share Fairly distributed equality
Proportional tax
= flat tax
Efficiency
= no DWL What happens to economy when DWL and administrative burdens stack up
Social cost
= private + external cost
Supply
= private cost
Abatement Cost
A cost borne by many businesses for the removal and/or reduction of an undesirable item that they have created. They generally incurred when corporations are required to reduce possible nuisances or negative byproducts created during production.
excludable
A good is ______ if a person can be prevented from using it.
no deadweight loss, Minimal administrative burden
A lump-sum tax is the most efficient because it ______ (Causes no does not distort incentives) and _____(No need to hire accountants, keep track of receipts etc.)
deadweight loss
A tax causes a
market quantity
A tax on a good reduces the ________ of that good.
Ex. Gasoline taxes
Amount of tax paid is related to how much a person uses public roads
problems with common resources
Are not excludable so the free rider problem cannot be prevented They rival in competition so each person's use reduces others' ability to use
social value
At any Q higher than the socially optimal Q, the cost of the last unit exceeds its ______
exceeds
At any Q lower than the socially optimal Q, the social value of the additional units _____ the costs of these additional units
Pollution
Burning fossil fuels produces greenhouse gases.
Important Common resources
Clean air and water Congested roads
Public Policies toward externalities (the two approaches)
Command-and-control policies Market-based policies
three negative externalities the gas tax targets
Congestion-- The more you drive, the more you contribute to congestion. Accidents-- Larger vehicles cause more damage in an accident. Pollution Burning fossil fuels produces greenhouse gases.
marriage taxes
Couple with similar incomes are likely to pay a ____
marriage subsidy
Couples with very different incomes are likely to receive a _____
lower quantity
DWL when there is a pos externality bc _______ is being produced Society is lost here bc valuable goods are not being produced at this point
socially optimal quantity
Eq pt of D and S+social cost
consumption tax
Europe's Value-Added TAx (VAT) is like a ______
Stubbornness
Even if a beneficial agreement is possible, each party may hold out for a better deal.
the gas tax
Example of correcive tax
negative positive
Externalities either _______ or _______ depending on whether impact on bystander is adverse of beneficial
Not excludable
FM radio signals, national defense (excludable or not excludable)
A pollution tax is efficient
Firms with low abatement costs will reduce pollution to reduce their tax burden. Firms with high abatement costs have greater willingness to pay tax.
Efficient outcome
Firms with the lowest abatement costs reduce pollution the most. (corrective races v. regulations)
free ride ; provide
For public goods, because people do not have to pay to use them, they have an incentive to ________ , and firms have no incentive to ______ them.
Regressive tax
High-income taxpayers pay a smaller fraction of their income than low-income taxpayers (Is the opposite of a progressive tax)
Coordination problems
If # of parties is very large, coordinating them may be costly, difficult, or impossible.
not excludable
If good is _______, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good
The Coase theorem
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. -Essentially asking / answering the question of whether the private market will reach the efficient outcome on its own
exceeds
If the benefit of a public good _____ the cost of providing it, gov should provide the good and pay for it with a tax on people who benefit -but measuring the benefit is difficult
positive
If the externality is ________ (e.g., technology spillovers), the market quantity falls short of the social optimum.
negative externalities
If the transaction yields _________ (e.g., pollution), the market quantity exceeds the socially optimal quantity.
negative externality
In a _______ Tax that gives buyers and sellers an incentive to take into account the external effects of their actions -Shift supply curve upward
social value
In the presence of a positive externality, the ________ of a good includes private value and external benefit
public policy
In the presence of externalities, ________ can improve efficiency
Accidents
Larger vehicles cause more damage in an accident.
common resources
Like public goods, ________ are not excluding -Cannot prevent free riders from using -Little incentive for firms to provide -Role for gov: seeing that they are provided
Average tax rate
Looks at overall burden on person liability / income
private goods
Markets work best for ________, which are excludable and rival in consumption. Markets do not work well for other types of goods.
Some important Public Goods
National defense Knowledge created through basic research Fighting poverty
tax and efficiency
One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers
social optimum
Other taxes and subsidies distort incentives and move economy away from the _______
Efficiency Equity
Policymakers have to choose between _______ and _______
efficiency ; equity
Policymakers often face a tradeoff between the goals of ______ and _____in the tax system.
result of tradable pollution permits
Pollution reduction is concentrated among those firms with lowest costs.
free-rider problem
Public goods are difficult for private markets to provide because of the _______. Result: the good is not produced, even if buyers collectively value the good higher than the cost of providing it
under-provided ; over-consumed
Public goods tend to be ______, while common resources tend to be ________
not efficient
Self-interested buyers and sellers neglect the external costs or benefits of their actions, so market outcome is --Consequences that are not baked into intersection of supply and demand
Negative externality
Shift Supply curve to the left Bc of the social cost tax
GDP
Tax revenue is relative to_____ and varies across countries
progressive tax system
The U.S. has a __________, in which high income taxpayers face a higher average tax rate than low income taxpayers.
Transaction costs
The costs parties incur in the process of agreeing to and following through on a bargain. These costs may make it impossible to reach a mutually beneficial agreement.
Marginal tax rate
The extra taxes paid on an additional dollar of income Measures the incentive effects of taxes on work effort, saving, etc.
cost-benefit analysis
The government provides public goods, using ________ to determine how much to provide.
Congestion
The more you drive, the more you contribute to congestion.
socially efficient
The private market may fail to provide the ________ quantity of such goods.
welfare
The socially optimal Q maximizes ________ -at any lower Q, social value is too high -at any higher Q, costs are too high
The cost to taxpayers
The tax payment itself Deadweight losses Administrative burden
property rights
These problems arise because _____ are not well-established -nobody owns the air so no one can charge polluters -nobody can charge people who benefit from national defense
taxation
To improve its functions gov raises revenue through _____
Average tax rate
Total taxes paid divided by total income -Measures the sacrifice a taxpayer makes
tax incidence
When evaluating the equity of a tax system, it is important to consider ______, as the distribution of tax burdens is not the same as the distribution of tax bills.
prices
When goods have no ________, the market forces that normally allocate resources are absent. ______ represents a change in interest, so can't allocate resources efficient because this is not present
the permits system
When policymakers do not know the position of this demand curve, _________ achieves pollution reduction targets more precisely.
socially optimal position
When taxes are placed on a market then the market is no longer at
corporation ; people
When the gov levies a tax on a corporation, the______ is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on ______
Permit
_______ = fixed quantity
permits
________ would be preferable to a tax in a situation where the polluting firm's demand for pollution rights is unknown and thus the gov would have difficulty determining the appropriate size for a tax
Free-rider
a person who receives the benefit of a good but avoids paying for it
not efficient
a regulation requiring all firms to reduce pollution by a specific amount is ________
Cost- benefit analysis
a study that compares the costs and benefits of providing a public good However, this lack accuracy / detail, so the efficient provision of public goods are more difficult than that of private goods.
Corrective tax:
a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality The way we deal with neg externalities to most
Flat tax
a tax system under which the marginal tax rate is the same for all taxpayers -Typically, income above a certain threshold is taxed at a constant rate -The higher the threshold, the more progressive the tax -Sharply reduces administrative burden -Not popular with people who currently benefit from the current system (accountants, lobbyists)
Social insurance taxes
a tax where you pay half and your employer pays half
Example of uncompensated
affected by water pollution in the ocean even though you didn't buy any of the aluminum that polluted it
Internalizing the externality
altering incentives so that people take account of the external effects of their actions -Market participants must pay the social costs, market equilibrium = social optimum
Budget surplus
an excess of gov receipts over gov spending
Budget deficit
an excess of gov spending over gov receipts
Permits
are a direct means of controlling the total quantity of pollution emitted
Corrective taxes
are better for the environment -gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax. -If a cleaner technology becomes available, the tax gives firms an incentive to adopt it. - firms have no incentive for further reduction beyond the level specified in a regulation.
most important revenue sources for state and local govs
are funds from the federal government and revenue from sales and property taxes. Income taxes are also important
Public goods
are neither excludable nor rival in consumption, That is people cannot be prevented from using a public good and one person's use of a public good does not reduce another person's ability to use it.
externalities
arise because something of value has no price attached to it.
Tragedy of the common
bc common resources are non-excludable and does rival in consumption there is no one controlling the good and people are over using the good, so don't enjoy doing something as much as you would -If I don't use it no one will use it -No incentive for someone to not use it because you can't be excluded from it -A parable that illustrates why common resources get used more than is socially desirable
Taxes distort incentive
cause people to allocate resources according to tax incentives rather than true costs and benefits
Pigouvian taxes
corrective taxes are also called _______ after Arthur Pigou (1877-1959).
equity
distributing the burden of taxes "fairly"
Equity
distribution of tax rev
"internalize the externality"
do this to combat the problem of neg and pos externalities -tax goods with negative externalities -subsidize goods with positive externalities
the Sierra Club
example of charities, a private solution to externalities
The Golden Rule
example of moral codes and social sanctions, a private solution to externalities
Club goods
excludable but not rival Example: cable TV
Private goods
excludable, rival in consumption Example: food
equity
fairness
Excludable
fish tacos, wireless Internet access (excludable or not excludable)
goods are not overused
for goods that rival in competition the government's role is to ensure that
corrective tax
gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax. If a cleaner technology becomes available, the tax gives firms an incentive to adopt it.
internalizing the externality
government can attempt to help solve the problem of the externality by _______ using corrective taxes, issue permits to polluters, and establish where permits can be traded.
Progressive tax
high-income taxpayers pay a larger fraction of their income than low-income taxpayers -The more you make the higher your marginal tax rate -the US has this type of tax rate
rival in consumption
if one person's use reduces others' ability to use the same unit of the good.
negative externality
if there is this than the market quantity is larger than socially desirable quantity
positive externality
if there is this than the market quantity is smaller than the socially desirable quantity
Gini coefficient
is a measure of statistical dispersion intended to represent the income distribution of a nation's residents, and is the most commonly used measure of inequality. (Lorenz curve)
A free rider
is a person who receives the benefit of the good but does not pay for it Ex. a standford person coming in and watching the Greenwich fireworks -If you can enjoy something without paying for it why would you pay for it
lump-sum tax
is a tax that is the same for every person
An efficient tax system
is one that imposes small DWL and small administrative burdens
tax incidence
is the analysis of the effect of a tax on the distribution of economic welfare
Indiv income tax
is typically the largest source of revenue for the US federal gov -Social insurance taxes is second
Corrective taxes
less you use less you pay
Consumption tax
like provisions in the US tax code include Individual Retirement Accounts 401(k) plans -People can put a limited amount of saving into such accounts -The funds are not taxed until withdrawn at retirement -IRA = tax deduction
marginal tax rate
looks at to see what the distortion of the burden would be over time
unfair
lump-sum taxes are efficient yet may be perceived as ___ -In dollar terms, the poor pay as much as the rich -Relative to income, the poor pay much more than the rich
Negative externality
market is producing more that socially wanted amount, Put tax
Positive externality
market, left alone, is producing too little quantity for what we want as a society. Put Subsidy on it -- to attract a greater quantity in the market. Supply and demand curves are not being shifted so we have to force the market to procure this quantity
Public goods
not excludable, not rival Example: national defense
externality
occurs when a market transaction affects a third party.
Consumption
paying for goods and services
common resources
people can use _________ without paying, so they tend to overuse them. Therefore, governments try to limit the use of them
Free-rider good
people can use the good but don't have to pay for it
US most important federal revenue sources
personal income tax, social insurance payroll taxes, and the corporate income tax.
Equilibrium pt
private cost / value Doesn't factor in externalities -only at this point is society's welfare maximized
inefficient ; Public policy
private decisions about consumption and production can lead to an ____ outcome, and ______ can potentially raise economic well-being.
Neg externality
produced goods when market is left unregulated where cost of producing good exceeds price being received / Qd for this good
positive externality
produces a quantity higher than market equilibrium. Shift the demand curve upward
Market-based policies
provide incentives so that private decision-makers will choose to solve the problem on their own. Examples: corrective taxes and subsidies tradable pollution permits Externality credits - here are 500 credits for 1 million tons of CO2 so you can trade Ones who value polluting the most pay the most
Different kinds of goods
public goods private goods common goods club goods
corrective tax
raises this price and thus reduces the quantity of pollution firms demand.
Tradable pollution permits system
reduces pollution at lower cost than regulation. -Firms with low cost of reducing pollution do so and sell their unused permits. -Firms with high cost of reducing pollution buy permits.
The income tax
reduces the incentive to save. The lost income compounds over time
The efficiency of a tax system
refers to the costs it imposes on taxpayers beyond their tax payments.
Command-and-control policies
regulate behavior directly. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions Tax things -- can be positive
tradable permits system
restricts the supply of pollution rights, has the same effect as the tax.
Common resources
rival but not excludable Example: fish in the ocean
Supply curve
shows private cost, the costs directly incurred by sellers
Supply curve
shows private cost, the costs directly incurred by sellers. Marginal private cost
Demand curve
shows private value, the value to buyers (prices they are willing to pay)
Demand curve
shows private value, the value to buyers (the prices they are willing to pay). Marginal private benefit
Positive externality
socially optimal quantity is higher than equilibrium. Produces a quantity higher than market equilibrium
Negative externality
socially optimal quantity is lower than equilibrium
excludible
someone can be prevented from using it.
The Coase theorem
states that the private market can reach the socially optimal allocation of resources as long as people can bargain without cost. In practice, bargaining is often costly or difficult, and _______ does not apply.
Public goods
such as national defense and fundamental knowledge, are neither excludable nor rival in consumption.
The benefits principle
suggests that it is fair for people to be taxed based on the amount of government benefits they receive.
The ability-to-pay principle
suggests that it is fair for people to pay taxes based on their ability to handle the burden.
Government receipts
tax revenue, contributions to social insurance programs, and income from government-owned assets.
Proportional tax
taxpayers pay the same fraction of income, regardless of income -A flat tax -You make twice as much, you pay twice as much
Costs of the tax system
the deadweight loss caused by the distortion of incentives from taxes. the administrative burden of complying with tax laws.
private value
the direct value to buyers
conflict
the goals of efficiency and equity often _____ Eg. lump-sum tax is the least equitable but most efficient tax
Benefits principle
the idea that people should pay taxes based on the benefits they receive from government services. Another goal of this tax policy is equity -Tries to make public goods similar to private goods, the more you use the more you pay ex) gas tax --> especially if the revenue from this tax is used to build or maintain roads
Ability-to-pay principle
the idea that taxes should be levied on a person according to how well that person can shoulder the burden -Suggests that all taxpayers should make an "equal sacrifice" -Recognize that the magnitude of the sacrifice depends not just on the tax payment, but on the person's income and other circumstances
Vertical equity
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts
Horizontal equity
the idea that taxpayers with similar abilities to pay taxes should pay the same amount -Problem = difficult to agree on what factors, besides income, determine ability to pay.
deadweight loss
the result of the fact that taxes distort incentives is _______, The fall in taxpayers' wellbeing exceeds the revenue the gov collects
most important state and local taxes
the sales tax and property tax.
Externality
the uncompensated impact of one person's actions on the well-being of a bystander -Action of two people on a third party
external benefit
the value of the positive impact on bystanders
Efficiency
trying to distribute the tax revenue with the smallest DWL
Externality
uncompensated impact of one person's actions on the well-being of a bystander. Can be positive or negative
External cost
value of the negative impact on bystanders -Value of harm from damaging aspects of life ex) $1 per gallon (value of harm from smog, greenhouse gases)
Consumption tax
would hurt the lower income people more -- pay a tax on everything you buy
