Foldvary Econ 1A

Science of Economics, chapter 16, Public Goods and Public Finance

Week 9, fiscal policy

Chapter 16 - public goods and public finance

Collective goods: non-rival. AKA public goods.

A collective good is fully used by more than one person at the same time.

The class whiteboard is a collective good.

Collective goods are non-rival.

If the service becomes crowded, it becomes rival.

One more person in a room with empty seats does not reduce your view of the board.

Public goods are collective, whether provided by government or private enterprise.

If private enterprise cannot provide the public goods wanted by the public,

at a price that covers the cost, this is called a “market failure.”

Market failure is the main rationale for governmental provision and intervention.

The argument is that people will be free riders unless they are forced to pay with taxes.

E.g. sidewalks, city park.

Overlooks private communities.

Territorial public goods generate higher land rental.

So users are not free riders - they pay rent to be there.

Who are the free riders? Landowners who benefit without paying.

Tenant workers get double billed - they pay higher rental and taxes.

Private communities only use the rental.

There is no subsidy or double payment.

Goods that are excludable and non-rival are called “club goods.”

Crowding creates a negative externality,

that can be avoided by congestion pricing.

public finance

Taxes in substance versus taxes in form.

Taxes in substance impose a deadweight loss.

They reduce production and growth.

Henry George: "We, in fact, treat the man who produces wealth, or accumulates wealth, as though he had done something which public policy calls upon us to discourage."

Employment, enterprise, consumption, production, exchange - all these are social benefits, yet taxation treats these as crimes fit to be punished.

"So, too, if a man saves, our taxes operate to punish him for his thrift."

A difference in taxing income and sales or value added is that income taxes penalize savings, while sales tax.

A tax on land value prevents a public-goods subsidy and has no deadweight loss.

Taxes on interest and dividends penalize savings.

Sales taxes impose a burden on consumption and borrowing.

Government marketizes when it taxes pollution and land value.

These are not taxes in substance, but the avoidance of subsidy.

governmental deficits and debt

Is a government budget deficit good or bad?

Ideal: split the budget into a current account and a capital account.

Best also for business and households.

Borrowing for investment in capital goods and human capital can be good finance.

Government debt for investment should take the form of bonds paid off at some time.

Like with a house mortgage.