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Topic 13
Topic 13
INTRODUCTION
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INTRODUCTION
• Excludability
– A good is excludable if a person can be
prevented from using it. How?
• An ice-cream is excludable because you cannot
consume it without paying the price.
• Rivalry in consumption
– A good is rival in consumption if one person’s use
diminishes other people’s ability to use it.
• An ice-cream is rival in consumption because if one
person eats an ice-cream, another person cannot eat
the same ice-cream.
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PRIVATE GOODS
• Consider a good such as an
apple
– Apple is a private good as
• If you don’t pay the price to eat an
apple you don’t get to consume it.
It is an excludable good.
• If you consume the apple then
others cannot consume it. The
apple has rivalry in consumption.
PUBLIC GOODS
• Now consider a good such
as national defence
– National defence is a public
good as
• Even if you don’t pay for it you
benefit from it – consumption is
not excludable.
• If you enjoy the benefits of
defence protection that does not
limit the ability of others to enjoy it
– consumption is non-rival.
– Many important goods in the
economy are public goods.
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CLUB GOODS
• Now consider membership of
a golf club
– This is an example of a club
good since
• Membership is excludable – if you
don’t pay your membership fee
you cannot play golf.
• But membership is non-rival – the
fact that you are a member does
not limit the ability of others to
join.
– So, a club good is an
excludable & non-rival good.
COMMON RESOURCES
• Finally consider a congested
non-tolled road
– This is an example of a common
resource/common property
• Road Use is non-excludable – you
can use it without paying anything.
• Road use is rival – there are costs
associated in terms of increased
travel times when an extra motorist
uses the road.
– Common resources are goods
that are rival in consumption but
not excludable.
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TYPES OF GOODS: SUMMARY
• Private goods
– both excludable & rival
• Public goods
– neither excludable nor rival
• Club goods
– excludable but not rival.
• Common property
– rival but not excludable
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FREE RIDER PROBLEM
• A free rider is a person who receives the
benefit of a good but avoids paying for it.
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PRIVATE PROVISION OF PUBLIC
GOODS
• Consider search engines such as Google
and Bing, and video-sharing sites such as
YouTube and Vimeo. These are public goods
since
– Anyone with a computer and internet connection
can use these for free, and
– one user does not reduce the benefit other users
can derive from the same program.
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COMMON RESOURCES
• Common resources are not excludable.
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IMPORTANT COMMON RESOURCES
• Clean environment
– Greenhouse gasses emitted into the air in one
country spread around the world contributing to
climate change in every country.
• Oil deposits
– If owners of the properties decide individually how
many oil wells to drill, they will drill too many.
• Congested roads
– When one person drives on the road, it becomes
more crowded, and other people must drive more
slowly.
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A GENERAL POINT: PROPERTY
RIGHTS ARE IMPORTANT
• Markets fail when property rights are not well
established
– when something of value does not have an owner
with the legal right to control use by pricing.
• Two principles
– Taxes should impose as small a cost on society as
possible and
– the tax burden should be distributed fairly.
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TAXES AND EFFICIENCY
• Costs of taxes include:
– tax payments by the taxpayers
– deadweight losses
– administrative burdens
• Deadweight loss
– We know that because taxes distort incentives, they
create DWLs and that
– DWL of a tax is the reduction in the economic
wellbeing of taxpayers in excess of the amount of
revenue raised by the government.
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MARGINAL TAX RATES VERSUS
AVERAGE TAX RATES
• When discussing the efficiency and equity of
income taxes, economists distinguish between
two notions of the tax rate:
– The average tax rate is total taxes paid divided by
total income.
– The marginal tax rate is the extra taxes paid on an
additional dollar of income.
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LUMP-SUM TAXES
• A lump-sum tax is a tax that is the same
regardless of earnings or any actions that the
person might take
– e.g. $100 per head regardless of who you are or what
you do.
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THE BENEFITS PRINCIPLE
• People should pay taxes based on the benefits
they receive from government.
– e.g. a petrol tax:
• Tax revenues fund our roads network.
• People who drive most pay most.
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VERTICAL EQUITY
• The idea that taxpayers with a greater ability-to-
pay taxes should pay most.
– For example, people with higher incomes should pay
more than people with lower incomes.
HORIZONTAL EQUITY
• The idea that taxpayers with similar abilities to
pay taxes should pay the same amounts.
– e.g. two families with the same number of
dependents & the same income living in different
parts of the country should pay the same taxes.
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CASE STUDY: WHO SHOULD PAY
FOR HIGHER EDUCATION
• Gough Whitlam’s Labour government in
Australia was elected in 1972
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CASE STUDY: WHO SHOULD PAY
FOR HIGHER EDUCATION
• In 1989, Bob Hawke’s Labour government
introduced a program to share the costs of
university education between
– the student and
– the taxpayer
called the Higher Education Contribution
Scheme (HECS).
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TAX INCIDENCE AND TAX EQUITY
• We know that the person who bears the burden
of a tax is not always the person who gets the
tax bill from the government.
– Taxes affect people beyond those who actually pay
the tax.
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SUMMARY
• Equity & efficiency are important goals of tax
policy.
SUMMARY
• According to the benefits principle, it is fair for
people to pay taxes based on the benefits they
receive.
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