Question 1
A pure public good refers to a good or service which would not be provided for, if the market is
left to operate on its own without government involvement (Black and Calitz, 2002). Public goods
are therefore not produced by private firms, virtually by their nature which include non-rivalry in
consumption, non-excludability, non-rejectibility and the free rider problem. The provision of
healthcare has been the prerogative of both the government and the private sector in many
economies around the world. The following is a discussion on whether healthcare should be
considered to be a public good.
Making healthcare a public good, and non-excludable can increase equality in terms of access to
the service among the citizens. The recent declaration by the World Health Organisation (WHO)
to consider the Covid 19 vaccine, a public good has enabled free vaccination to take place equally
in most countries around the world. Non-excludability means that the benefits derived by one party
in the consumption of a good or service can be extended to other individuals at no costs. For
example, the attainment of herd immunity following the vaccination of people against the novel
coronavirus will be non-excludable.
Black and Calitz (2002) states that making healthcare a public good, instills the sense of
responsibility to the government to provide better quality medical care, through investing in
medical research and provision. The government is strategically positioned to provide healthcare
needs to its citizens for example the National Health Service (NHS) in the United Kingdom is run
by the government. Moreover, the government has a mechanism to make the consumers of public
goods to pay for them through levying taxes and therefore making the provision of such nonrejectable.
Mohr P et-al (2015) also contends that nationalizing healthcare helps governments especially in
developing countries to have better equipped health facilities as well as better quality health
services. Most governments in the developing world do not take the state of their health
infrastructure seriously. This can be attributed to the fact that there is a very low budget allocations
towards health, and also the fact that healthcare is also provided by the private sector. Therefore,
if healthcare is declared a public good, it will increase the sense of responsibility on the
government.
However, making healthcare a public good is fraught with its own problems as explained below.
Black and Calitz (2002) contends that, healthcare by nature is a mixed good which should be
provided both by the government and the private sector. There is no free rider problem because
some of the services that are provided in healthcare requires costly medical research that the
government may not be prepared to incur because of other areas of responsibilities that the
government is mandated with such as education, defence and security, infrastructure development
among others. This also results in the over-burdening of the government in as far as the taxpayers’
money is concerned.
Nationalizing healthcare results in the inefficient provision of the service to the citizens, this is
because the government would not be in a better position to determine the health needs of its
citizens. Since healthcare is more inclined to a private good, in that there is excludability feature,
which means that the consumption of such can be restricted to given individuals. There is also
rivalry in consumption when it comes to the consumption of healthcare in an economy.
Healthcare is generally not considered a public good because non-paying individuals may not be
able to achieve good health. Efforts to introduce the universal health care in many countries will
move healthcare towards being a public good. The adoption of social insurance systems or other
publicly financed health insurance, where citizens are insured and can utilize healthcare, whether
they can afford it or not, suggests that insured health services then become non-excludable and
non-rivalrous.
Question 2
Social security is a powerful tool to alleviate poverty and inequality. Bastagli F(2014) argues that
cash transfer programmes have been implemented in many countries as a key component of their
national social security floors and these programmes provide a regular income to poor households.
South Africa is one of the most unequal societies in the world with inequality deeply entrenched
on racial lines, which is a result of the apartheid system. To alleviate the income inequalities, the
cash transfer grants which are disbursed by the government goes a long way in reducing the income
inequalities and enable the majority poor to have access to basic necessities to sustain the quality
of their life.
Mohr P et.al (2015) states that, the regular incomes paid monthly from the cash transfers goes a
long way in alleviating the poverty levels which are endemic in South Africa. Most households
without government support in form of cash grants may languish in poverty, which would also
create other socio-economic problems such as prostitution, increased crime and other
psychological problems. This is also worsened by high levels of unemployment especially among
the youthful population in South Africa.
The Covid 19 pandemic has led to the loss of employment in South Africa as some businesses
failed to recover from the debilitating effects of the virus on the economy. This has led to loss of
work and income for many households in South Africa. The introduction of the cash transfer grant
is meant to mitigate the effects of loss of income which emanates from the economic impact of the
pandemic on the livelihoods of people.
The impact of the personal income financed cash transfer grant is illustrated below
Income
tax effect
b
E1
I2
E3
a
0
E0
Time in Hours
I3
I1
Work Effort
The diagram above shows the effects of a cash grant on the income and work effort applied by the
individual. The initial equilibrium is at E0 which is associated with the initial budget line and
indifference curve I1. With a cash transfer, the budget line will experience a parallel shift upwards
to equilibrium E1 which is associated with the increase in income from a to b. Following an
imposition of a personal income tax, the budget line swivel downwards to result in a new
equilibrium at E3. Therefore, the work effort decreases initially from E0 to E1 and subsequently to
E3. Income initially increases, but after the introduction of the personal income tax, the income
would decline.
Offering cash transfer grants financed by taxes creates a dependency syndrome on the government
and is widely criticized for promoting laziness. Cash grants maybe counter productive because
individuals may reduce the amount of work effort. In this regard, such social security payments
should only be paid to the extent that they do not become a disincentive for work. Moreover, they
may create a poverty trap if individuals always rely on government for cash payments to sustain
their livelihoods.
Question 3
An ad valorem duty is a tax levied as a percentage of the value of a product. Black and Calitz
(2002) states that ad-valorem taxes are imposed on the value of the products and usually are levied
as a percentage of the excisable value of a commodity. The taxes are usually imposed on luxury
goods.
The effect of an ad-valorem tax on crayfish is illustrated in the diagram below
Price
S0 + tax
A
Pm
P0
S0
Buyers’ share of tax B Tax Amount
Sellers’ share of tax
P1
C
Q1
D0
Q0
Quantity
The initial equilibrium is at Q0, following the imposition of an ad-valorem tax, the supply curve
swivels upwards to S0 + tax, leading to a new equilibrium at A. The above rectangle shows the
buyers’ share of the tax and the bottom rectangle denotes the unshifted burden that has to be borne
by the supplier.
A luxury good such as crayfish is associated with elastic demand and therefore, much of the tax
burden would be expected to be borne by the suppliers, who may not be able to pass on much of
the tax burden in form of higher prices to consumers.
The ad valorem tax on crayfish is considered to be regressive in the sense that, those who can
afford to buy the crayfish are affected by the tax burden. however, since most workers who work
in crayfish processing plants can be considered to be low-income members of the society. The
impact may be felt by consumers who are considered to be high income earners. Since the
producers of processed crayfish bear the greater burden of the tax, they may reduce the production
of crayfish which may result in the loss of jobs or simply the cut in real wages in the crayfish
processing plants.
Question 4
The Tiebout model asserts that if there is a large number of local government jurisdictions, and
each of these local government offered a different mix of local public goods and taxes, individuals
would reveal their true preferences for local public goods by choosing a certain local government
jurisdiction to live in. Black and Calitz (2002) argued that, this would depend on the nature of the
public goods produced and delivered by the government. The authors further maintained that some
public goods are national and global in scope and therefore have no bearing on the preference of
location by individuals.
The model states that citizens who have different tastes are mobile and choose to settle in the local
government jurisdictions that produce a mix of tax and public good outputs which correspond most
closely to their preferences. Their choice in terms of location reveals their preferences for public
goods in the same manner that their choice of private goods purchased in the market reveals their
preferences for private goods.
Black and Calitz (2002) The greater the of communities and the greater the variation in taxes and
public services offered, the closer consumers will be to satisfying their preferences. Under these
circumstances, local public goods can be decentralized in a way that is immune to the free rider
problem.
Tiebout’s notion of ‘voting with one feet’ permits the revelation of preferences by allowing
individuals to sort themselves into groups with similar tastes. Moreover, the equilibrium that will
be achieved by voting with one feet will be Pareto Efficient. The model thus describes a theoretical
solution for the problem of preference revelation, a phenomenon that inhibits the achievement of
allocative efficiency.
The Tiebout model is based on the following set of assumptions; all citizens are fully mobile;
individuals have full information about the local public goods offered by each jurisdiction. It also
assumes that there is a large number of jurisdictions to choose from, spanning from the full range
of public good combination desired by citizens. There are no geographical employment restrictions
and the absence of spillovers across jurisdictions. There are also no economies of scale in the
production of public goods.
The Tiebout model clearly demonstrates that a decentralized fiscal system which can
accommodate a diversity of preferences for public goods can be welfare increasing in relation to a
centralized system which imposes a standardized public good-tax mix on people despite their tastes
and preferences. Fiscal decentralization can contribute to a more efficient provision of local public
goods by aligning expenditures more closely with local priorities.
The model goes a long way in explaining the migration of individuals from poorly serviced
locations into jurisdictions where there are better public goods provisions such as roads and
communications networks. Most citizens with modest to high incomes have been recently moving
from regions with poor public goods provisions to well serviced jurisdictions in South Africa.
However, the model falls short when explaining tax mixes. The tax system in South Africa is
determined on a national level and therefore local governments only determine rates such as water
and sewer reticulation charges and other license fees. Hence the decision to choose jurisdictions
does not depend on local government tax systems.
References
1. Black, Calitz and Steenkamp (2002) Public Economics, 5th Edition, Oxford University
Press.
2. Mohr P et-al (2015) Economics for South African Students 4th Edition, Van Schick
Publishing Company.
Biography
My name is Mark Mbayiwa, a retired army officer with the Zimbabwe National Army. I was born
in 1956 in Nyamandlovu, near Bulawayo, Zimbabwe. I am married and blessed with 4 children
and grandchildren. I undertook a number of courses both in my military years and after retirement
such as Military and Civil Strategy for Internal Development in the United States. I also hold
several Diplomas