Externalities, Subsidies, and Taxes. Unit 4: Economics of the Public Sector

Transcription

1 Externalities, Subsidies, and Taxes Unit 4: Economics of the Public Sector

2 Positive Externalities Goods and services that generate positive externalities tend to be underproduced relative to their benefits Governments try to allocate resources to these goods and services Public provision governments supply these goods and services directly (EX: public education, USPS, air-traffic control system) Subsidies Providing monetary incentives to consumers and producers of these goods and services

3 Subsidies Subsidy = A government payment to a supplier or consumer Types of subsidies: Grants Low-interest loans Vouchers Direct payments to producers

4 Negative Externalities Goods and services that produce negative externalities tend to be overproduced relative to their costs Government tend to try to limit the production of these goods and services Command-and-Control policies Market-based policies

5 Command-and-Control Polices Regulatory agencies issue rules that individuals and firms are expected to follow Command and Control Policies include: Manufacturing regulations Packaging regulations Performance standards

6 Market-based Policies Incentives, promoted by the government, to change producer s or consumer s behaviors Market-based policies include: Corrective tax = the incentive to correct behavior is t0 not pay the tax Cap and trade = puts limits on the amount of the negative externality producers produce but allows firms to sell their unused amounts to others The incentive is to use innovation to reduce the negative externality and be able to make a profit on the unproduced amount of the negative externality

7 Cap and Trade

8 Tragedy of the Commons When property rights are not welldefined, resources can be considered held in common meaning owned by all or owned by no one person People lack the incentive to care for common resources and to ensure that those resources are preserved for future use

9 Preserving Common Resources Tolls Pay for the use of a common resource Quotas Impose a maximum amount of a resource that a person can use or consume in a given period of time Privatization Turn the common resource into a private one thus establishing clearly defined property rights

10 Preserving Common Resources

11 Government and Public Goods No profit-seeking firm can be expected to provide a good that consumers do not have to pay for A government is not a profit-seeking firm Taxes are collected and all tax payers can benefit from the public good How can a government determine which public goods it should offer and what is the optimal amount?

12 Cost-Benefit Analysis Governments seek to determine the will of society to provide a public good and how much to produce by: Surveying the population ( society s willingness to pay ) Basing decisions on elections and referendums Weighing the Social Costs against the Social Benefits However, these determinants can result in the inefficient use of resources (= a government failure )

13 Government and Economic Well- Being Promoting Economic Stability Ensuring that economic recessions do not turn into economic depressions Maintaining the value of the dollar Stimulating business activity (tax rebates or incentives) Economic stimulus Ensuring steady, rather than dramatic, economic growth occurs Maintaining the value of the dollar (Monetary Policy, managing interest rates)

14 Government and Poverty In a market-economy, resources are allocated/distributed efficiently but not always fairly As a result, income is not distributed equally among all Americans The poverty rate is a method to measure the economic well-being of the lowest income earners in the US. The government supports programs that tries to reduce the amount of people who live in poverty

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16 Redistributing Income Government programs established in the 20 th century try to help the poorest members of society and reduce the income gap between rich and poor: Social Security for the elderly Welfare programs (Food stamps, work training programs, public housing, Medicaid, free school lunches, etc.) Earned Income Tax Credit reducing or eliminating payroll taxes of poor working families Unemployment insurance providing a payment for laid-off workers for a certain period of time

17 Unintended Consequences of Anti- Poverty Policies Critics of anti-poverty policies say that these policies: Create a dependency on the government Reduce incentives to be self-sufficient Means-tested programs Responses to these criticisms: Work for welfare programs = have to be in a job training program to qualify for welfare aid Increase the income limit on means-tested programs Public service employment