Public Goods, Taxes &
Income Distribution
Chapter 11
2 KINDS OF GOODS
• Public Goods
• Goods that are neither excludable nor rival in consumption
• Private Goods
• Goods that are both excludable & rival in consumption
Excludable- consumer who can not pay are excluded
Rival- consumption by one reduces quantity for others
Public Goods: clean air, police protection, radio signals, national defense
Private Goods: Food, Coffee, airline tickets
Public Good Efficiency
• When goods are available free of charge => market
forces will not allocate resources efficiently
• Government should collect taxes & provide public
goods when:
– Total Benefits ≥ Total Costs
• Examples:
– National Defense
– Basic Research
– Fighting Poverty
Problems with Public Goods
• Free-rider- a person who receives the benefit
of a good but avoids paying for it
• Examples:
– “Slacker” in group work at School
– Volunteer money for neighborhood cleanup
– Fundraising for Fire Department
Types of Taxes
• Progressive Tax– Income ↑ => Average Tax Rate ↑
– Example: U.S. Federal Income Tax
• Regressive Tax– Income ↑ => Average Tax Rate ↓
– Example: Sales Tax, Gasoline Tax, Bridge Tax
Tax Incidence:
Who Pays?
• Proportional Tax
– Income ↑ or ↓ => Average Tax Rate stays the same
– Example: Flat Income Tax, Corporate Taxes
• Excise Tax
– Flat fee per unit, paid at purchase
– Example: Cigarettes, Gasoline (both are also regressive in tax incidence)
Progressive Income Tax
}
Tax Brackets
Tax rate
Single filers
10%
Up to $7,000
15%
$7,001 - $28,400
$28,401 - $68,800
$68,801 - $143,500
$143,501- $311,950
$311,951
or more
25%
28%
33%
35%
Example: If you Earn $100,000
($ 7,000 - 0 )
x 10%
(28,400 - 7,000 ) x 15%
(68,800 - 28,400 ) x .25 %
(100,000 - 68,800 ) x .28%
=
=
=
=
Total:
Actual Tax Rate:
$700
3,210
10,100
8,736
$ 22,746
22.7%
Income Distribution & Lorenz Curve
Egalitarian Society- equal society
How to best measure Inequality:
Lorenz Curve A
• Average Income:
• incomplete measure
• often inaccurate
• Distribution of Income
• more precise measure of inequality
• Lorenz Curve illustrates income
distribution
Line of Perfect equality
Lorenz Curve B
Gini Index Summary
•
•
•
•
Measures the distance from line of “perfect equality” to Lorenz Curve
Gini Index ranges from Zero to 1
An index of 0 (zero) means perfect EQUALITY (on line)
As the Gini Index moves from 0  1 inequality increases
Lorenz Curve A
Line of Perfect equality
Lorenz Curve B
U.S. Gini Index Comparison
• U.S.A.
.46
•
•
•
•
•
.26
.32
.33
.58
.59
Japan
Germany
France
Bolivia
Brazil
Worksheets
• What is a Fair Tax
• Worksheet A: Who pays the most Taxes
Tax Cut Controversy