Market Failure and Government
Government and Market Failure
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Externalities
Coase Theorum
Public Goods
Tax Types and Theories
Wealth Disparity and Redistribution of Income
Asymmetric Information
*Chapters 12, 19, and 20*
*The next several slides are just a review of tax
incidence and DWL of tax and subsidy
Tax Incidence
Tax Incidence
• Nominal (Statutory) versus Economic Incidence
• If “law” doesn’t matter, what does?
Deadweight Loss
• Allocative Inefficiency
• Do subsidies produce DWL??
• If so, where does it appear?
Deadweight Loss of Subsidy
Deadweight Loss
• Could a tax eliminate deadweight loss?
Agenda
• Why +MEC or –MEB won’t change tax incidence or
nominal price
• Coase Theorum Article (1 page…okay 1 ½)
• Public v. Private Goods
• Tax Philosophies and Types
**HW- Coase Theorem and Pollution
Due tomorrow- collected
Externalities- simplified
• Negative
– MPC < MSC
– Per unit tax equal to MEC
• Positive
– MPB<MSB
– Per unit subsidy equal to MEB
Coase Theorum
"if trade in an externality is possible and there
are no transaction costs , bargaining will lead to
an efficient outcome regardless of the initial
allocation of property rights”
Public v. Private Goods
• Pure Private
– Excludable and Rival
– Example: Chia Pets
• Pure Public
– Nonexcludable and Nonrival
– Example: National Defense
– Government generally must provide
– Free Rider Problem
• Solutions: taxes versus donations
Public v. Private Goods
• Toll Goods
– Excludable and nonrival
– Example: Cable TV, Toll Road (often natural monopolies)
• Common-pool Resources
– Nonexcludable and rival
– Example: fish in the public waters, congested roads
– Government often regulates
• Quotas, licensing fees
Answers According to AP Resource Guide
Red denotes a strong argument for alternative placement, but I guess we should go
with the AP guide.
Pure Private Goods
Electric Power
Haircut
Rabies Shot
Potato Chip
Common Resource
Toll Goods
College education
Amusement Park
Cable TV
Panama Canal
Uncongested Toll roads and bridges
Healthcare
National Forest Campgrounds
Pure Public Goods
National Defense
Spraying for Mosquitos
Street Lights
Police and Fire Protection
Paying for Public Goods- Tax Philosophies
• Benefits Received Principle
– Closer to free market solution
– Example- Gas tax to fund highways/Cigarette Tax
• Ability to Pay Principle
– Redistribution of Wealth/Equity
– Example: Progressive income tax
State Revenue
Taxes
• Progressive
• Proportional (flat)
• Regressive
*Based on % of income
Income Tax
• Progressive Tax (Federal)
Income Tax
• Progressive Tax (Federal)
State (PA) Income Tax
• Proportional Tax/Flat Tax
• PA = 3.07%
State Sales Tax
• 6%
• Proportional or Regressive?
Social Security Tax
• Social Security
– Employee
• 6.2% on first $117,000
• 0% above $117,000
• Regressive tax
– Payroll Tax
• Employer matches contribution
Social Security Tax
• Who really pays it?
• Is it shared equally as the law would suggest?
• Does it depend on the particular labor
market?
Taxes on Kevin White
Distribution of Wealth
• Measures
– Lorenz Curve and Gini Coefficient (see handout)
• Redistribution/Reduction of Inequality
– Transfers
– Control Market Prices
– Progressive Taxes
• Efficiency versus Equity
Measuring Inequality
• Lorenz Curve
– Farther from 45 = greater inequality
• Gini Coefficient
– 0 = complete equality
– 1 = complete inequality
– A/A+B
Redistribution/Reduction of Inequality
– Transfers
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WIC
TANF
SNAP
Unemployment Comp
Obamacare
– Control Market Prices
• Minimum wage
• Rent control
– Progressive Taxes
• Income Tax – largest federal revenue source
Equity versus Efficiency
• Thoughts?
• Cons of each?
Asymmetric Information
Adverse Selection
-Before Transaction
Moral Hazard
-After Transaction
Examples
-Used Cars
-Health Insurance
-Loans
-Infomercials
*I was watching QVC
Examples
-Health Insurance
-Car Insurance
-Loans
-Helmet Requirements
Asymmetric Information
Private Remedies
-screenings
-credit checks
-warranties
Public Remedies
-inspections
-standards
-certifications
-reports
-lemon laws
Public Choice Theory
• Rational Choice Theory- individuals act in self-interest
• Private Sector- yep
• Public Sector- yep
• Uhhh ohhh…
Public Choice Theory
• Private Sector- generally profits
• Public Sector
– Power
– Special Interests
– Rent Seeking
– Bribes
– Reelection
– How good would some nachos and wings be right
now?
Public Choice Theory
• Market Failure v. Government Failure