Finals
annual income less the amount of that income saved that year
Governments tax economic activities, including
income-earning activities and consumption of goods and
services
Other means of obtaining funds
● Governments also raise funds from enterprises they
operate
● Fees and charges
● Governments must borrow funds when they cannot
cover all their expenditures from tax and nontax
receipts
What Are Taxes?
Taxes are compulsory payments associated with certain
activities.Revenues collected through taxation are used
to purchase the inputs necessary to produce government-
supplied goods and services or to redistribute purchasing
power among citizens.
Tax financing refers to the use of tax revenues by
governments to finance their activities,including the provision
of goods and services to citizens.
Taxation can cause changes in the relative prices of some
inputs due to government demands on resources and the
reduction in private demands caused by taxes.
Tax Base item or economic activity on which the tax is levied.
What are the most commonly used tax bases?
● Income
● Consumption
● Wealth
Income
sum of the value of his annual consumption of goods and
services and annual saving.
Consumption
Wealth - value of a person’s accumulated savings and
investments at any point in time
Consumption- is the portion of income that is not saved, while
wealth is the net value of a person’s stock of accumulated
savings or investments.
General Tax - taxes all of the components of the economic
base, with no exclusions, exemptions, or deductions from the
tax base
Selective Tax -taxes only certain portions of the tax base, or it
might allow exemptions and deductions from the general tax
base
Tax Rate Structure- describes the relationship between the
tax collected during a given accounting period and the tax
base.
1. Proportional Tax Rate Structure- is one for which the
ATR
does not vary with the value of the tax base sometimes called
a flat-rate tax.
2. Progressive Tax Rate Structure the ATR increases
with the size of the base. The larger the tax base, the
larger the ATR applied.
3. Regressive Tax Rate Structure ATR declines as the
size of the tax base increases
ABILITY-TO-PAY PRINCIPLE taxes should be distributed
according to the capacity of taxpayers to pay them.
HORIZONTAL EQUITY achieved when individuals of the
same economic capacity (measured, for example, by income)
pay the same amount of taxes per year (or over their
lifetimes).
PRELIM Government Expenditure -portion of the national budget.
Public finance - field of economics that studies government Classification of Expenditures
activities and the alternative means of financing A.Current Operating Expenditures
government expenditures. B. Capital Outlays
Process of Public Finance A. Current Operating Expenditures
1. Formulation of Fiscal and Monetary Policy appropriations for the purchase of goods and services for
2. Generation of Revenue from Taxation and Other Sources current consumption or for benefits expected to terminate
3. Expenditure of Funds Through The National Budget within the fiscal year
4. Public Borrowings 1. Personal Services
Why do the Government Borrow? 2. Maintenance and Other Operating Expenses
● To finance national government deficits; B. Capital Outlays
● To obtain foreign exchange; appropriations for the purchase of goods and services.
● To secure financing at more favorable terms than the MODES OF DISBURSEMENT
opportunity cost of revenues; 1. Cash
● To take advantage of benefits attached to the funds, 2. Checks
e.g. technology; and, 3. List due and demandable accounts payable advice to
● To balance the timing of resources with the project debit accounts
gestation and repayment of benefit. 4. Tax remittance advice
Governments - organizations formed to exercise authority 5. Working Fund
over the actions of people who live together in a society and to 6. Direct payment method
provide and finance essential services. POSITIVE AND NORMATIVE ECONOMICS
Political institutions Constitute the rules and generally Positive economics scientific approach to analysis that
accepted procedures that evolve in a community for establishes cause and-effect relationships among economic
determining what government does and how government variables.Statement what is, what was, what will be “If..then”
outlays are financed. Normative economics based on value judgments about what
Mixed Economy - government supplies a considerable is desirable or what should be done to achieve the desired
amount of goods and services and regulates private economic outcome.“should”,“think”,“ought to”,Cannot be tested
activity. Marginal Conditions for Efficiency
Pure Market Economy - all goods and services would Marginal Social Benefit of a good is the extra benefit
be supplied by private firms for profit and all exchanges of obtained by making one more unit of that good available per
goods and services would take place through markets, with month (or over any other period).
prices determined by free interplay of supply and demand.
Total Social Benefit Any given quantity of an economic good
available will provide a certain amount of satisfaction to those
who consume it
Marginal Social Benefit measured as the maximum
amount of money given up by people to obtain the extra unit of
the good.
Total Social Cost value of all resources necessary to make a
given amount of the good available per month
Marginal Social Cost minimum sum of money required to
compensate the owners of inputs used in producing the good
for making an extra unit of the good available.
Marginal Net Benefit difference between its marginal social
benefit and its marginal social cost
MARKETS, PRICES, AND EFFICIENCY CONDITIONS
Why do we have markets?
Markets are organized so that there's a mutually gainful trades
between buyers and sellers
Marginal private benefit (MPB) dollar value placed on
additional units of the good by individual consumers.
MPB = MSB provided that no one except the buyer receives
any satisfaction when the good is consumed.
Marginal Private Cost (MPC) cost incurred by sellers to
make an additional unit of output available for sale.
When Does Market Interaction Fail to Achieve Efficiency?
1. Monopolistic Power -influences the price of the
product it sells by reducing output to a level at which
the price it sets exceeds marginal cost of production
2. Monopoly inefficiencies -Can restrict output leading
to higher prices therefore lead to the under-
consumption of the goods or services that the
monopoly produces.
Subsidies benefit given by the government to groups or
individuals, usually in the form of a cash payment or a tax
reduction.
Economic Stabilization Governments engage in monetary
and fiscal policies in an effort to stabilize the economy.
EQUITY VERSUS EFFICIENCY
EQUITY perceived fairness of an outcome
Utility-possibility curve The trade-off between improvements
in efficiency and changes in the distribution of welfare.
Equity-Efficiency Tradeoff conflict between maximizing
economic efficiency and maximizing the equity (or fairness) of
society in some way.
Mid - term
EXTERNALITIES AND GOVERNMENT POLICY
EXTERNALITIES costs or benefits of market transactions not
reflected in prices
NEGATIVE EXTERNALITIES aka external costs ,costs to third
parties not reflected in the market price
POSITIVE EXTERNALITIES benefits to third parties not
reflected in prices
PECUNIARY EXTERNALITIES effects of increases (or
decreases) in the price of a good on existing consumers as
a result of changes in the demand or supply of a good
REAL EXTERNALITIES ARE UNPRICED COSTS OR
BENEFITS
MARGINAL EXTERNAL COST (MEC) extra cost to third
parties resulting from production of another unit of a good or
service.
MARGINAL PRIVATE COST (MPC) It is the marginal cost that
producers base their decisions
POSITIVE EXTERNALITIES prices do not fully equal the
marginal social benefit of a good or service
INTERNALIZATION OF EXTERNALITIES
INTERNALIZATION OF AN EXTERNALITY occurs when the
marginal private benefit or cost of goods and services
are adjusted so that the users consider the actual marginal
social benefit or cost of their decisions
UNDER NEGATIVE EXTERNALITY marginal external cost is
added to marginal private cost for internalization
UNDER POSITIVE EXTERNALITY marginal external benefit
is added to marginal private benefit to internalize the
externality
CORRECTIVE TAXES: A METHOD OF INTERNALIZING
NEGATIVE EXTERNALITIES
CORRECTIVE TAX designed to adjust the marginal
private cost of a good or service in such a way as to internalize
the externality
CORRECTIVE SUBSIDIES: A MEANS OF INTERNALIZING
POSITIVE EXTERNALITIES
CORRECTIVE SUBSIDY payment made by government to
either buyers or sellers of a good so that the price paid by
consumers is reduced.
COASE THEOREM The Coase theorem is an economic and
legal theory that addresses dispute resolution between two
parties without any transaction cost PROPOSED BY Ronald
Coase
PUBLIC GOODS ARE NONRIVAL IN CONSUMPTION
PRIVATE GOODS Goods that are rival in consumption
NON EXCLUSION implies that it is too costly to develop a
means of excluding those who refuse to pay from enjoying the
benefits of a given quantity of a public good
CHARACTERISTICS OF A PUBLIC GOOD
Nonexcludable Nonrivalrous
- costly or impossible - when one person
for one user to uses a good, it does
exclude others from not prevent others
using a good. from using it.
FREE RIDER someone who wants others to pay for a public
good but plans to use the good themselves
PURE PUBLIC GOOD nonrival in consumption for an entire
population of consumers, and its benefits have the
characteristic of non exclusion
MARKET EXCHANGE FOR PURE PRIVATE GOODS
Leads to neither positive nor negative externalities.
MARKET EXCHANGE FOR PURE PUBLIC GOOD
results in widely consumed external benefits to all people
CONGESTIBLE PUBLIC GOODS There are public goods
where,after a point, the enjoyment received by the consumer
is diminished by crowding or congestion.
PRICE-EXCLUDABLE PUBLIC GOODS those with benefits
that can be priced.
Lindahl Equilibrium theoretical state of an economy where
the optimal quantity of public goods is produced and the cost
of public goods is fairly shared among everyone.
Public Choice made through political interaction of many
people according to established rules