Lecture Notes: Dec. 4

Econ. 103, Fall 2002, Prof. Nancy Folbre

Cover Chapter 15, on government spending and taxation.

Review of main points from Chapter 14:

The economics of health care--we've gone from a system that provided NO incentives to save money to one that provides incentives so scrimp on care for the insured and leaves many people completely uncovered by insurance. Once, we relied largely on pay per service insurance in which neither doctors nor patients, but rather insurance companies, paid health costs. Now, we rely largely on Health Maintenance Organizations, which penalize providers who are too "generous" with their time or diagnostic expenditures

There must be a better way--though the description in the text doesn't provide much in the way of useful detail for alternatives. Single-payer insurance, like the Canadian system, is likely to emerge as a possible reform strategy.

The economics of the environment--rather than providing "one size fits all" rules concerning reduction of pollutants we would do better to use pollution taxes or sell pollution permits that encourage those firms for which it is the least expensive to reduce pollution to do so more than others (an application of the "low hanging fruit" principle). See the example below.

Cost of Reducing Pollution for Two Firms with Five Technologies

Which technology would each firm use in the absence of regulation? What would resulting level of pollution be?

Each would use Process A. Resulting pollution=8 tons.

What would be the effect of a regulation requiring each company to reduce by one-half?

Each would use technology C. Total cost would be 980, compared to 400 using technology A. So total additional cost is $580.

Now, what would the effect be if the government auctioned the price of a pollution permit for one ton at $101?

Chapter 15. Key Concepts:

Private goods--like doughnuts or hamburgers--when you eat one, that means there's one less for someone else. Also, you generally can't get one unless you pay for one.

Nonrival goods--your consumption does not reduce someone else's consumption. Eg. television programs or the Internet, or military spending--everyone in reach of the broadcast or hooked onto the internet or living in the country doing the military spending tends to benefit. Often this is a matter of degree--up to a point, for instance, a highway is a nonrival good. In a traffic jam, it becomes a rival good.

Nonexcludable goods--these are goods it's hard to charge money for so people will tend to get them whether they pay for them or not. A highway is a nonexcludable good unless it is a toll road. Clean air (at least so far) is a nonexcludable good. Peace is a nonexcludable good, as is war. Music that is downloadable over the Internet in MP3 form is a nonexcludable good (though record companies try as hard as possible to make it excludable).

Progressive taxes--the percentage paid goes up along with income, as with federal and state income taxes. The estate tax was an example--only those with estates of more than a million were even covered by it

Regressive taxes--the percentage paid goes down along with income, as with Social Security taxes (only the first $70,000, about, of earnings is taxed) or with a sales tax. Any sales tax is regressive because those with low income spend all their income plus whatever they can borrow to consume, while those with high income money tend to save and invest. A sales tax does not take a bite out of savings and investment

Proportional taxes--the overall percentage of income paid is constant. In the U.S. the effects of the taxes described above largely cancel out, resulting in taxation that is roughly proportional overall--but recent policies are moving us in a regressive direction