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Level 141

Public Choice Theory & the Economics of Taxation


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Majority Voting
Fiscal (taxation and spending) policy decisions are made by society indirectly via elected officials
Inefficient Voting Outcomes
Social wellbeing is enhanced when government provides a public good whose total benefit exceeds its total cost
Adams receives $700 in benefits
Inefficient "No" Vote - Example A
Adams receives $100 in benefits
Inefficient "Yes" Vote - Example B
Implications
Inefficient Voting Outcomes
Interest groups
Inefficient Voting Outcomes 2
Political Logrolling
Inefficient Voting Outcomes
paradox of voting
a situation in which society may not be able to rank its preferences consistently through paired-choice majority voting
median-voter model
under majority rule and consistent voting preferences, the median voter will in a sense determine the outcomes of elections
Median-Voter Model 2
Adams, Benson, and Conrad are voting on a creating a weather detection system.
Median-Voter Model3
Real-world application
government failure
economically inefficient outcomes caused by shortcomings in the public sector
special-interest effect
any outcome of the political process whereby a small number of people obtain a government program or policy that gives them large gains at the expense of a much greater number of persons who individually suffer small losses
Rent-Seeking Behavior
Government Failure 3
Clear Benefits and Hidden Costs
Vote-seeking politicians will not weigh objectively all the costs and benefits of various programs, as economic rationality demands in deciding which to support and which to reject
Limited and Bundled Choice
The political process forces citizens and their elected representatives to be less selective in choosing public goods and services than they are in choosing private goods and services
Bureaucracy and Inefficiency
Some economists contend that public agencies are generally less efficient than private businesses
Imperfect Institutions
Otto Eckstein - "The relevant comparison is not between perfect markets and imperfect governments, nor between faulty markets and all-knowing, rational, benevolent governments, but between inevitably imperfect institutions."
Apportioning the Tax Burden
Tax burden - total cost of taxes imposed on society
Apportioning the Tax Burden2
Tax burden should be apportioned according to taxpayers' income and wealth
Progressive Tax
Progressive, Proportional, and Regressive Taxes
Personal Income Tax
Progressive, Proportional, and Regressive Taxes 2
Payroll Tax
Progressive, Proportional, and Regressive Taxes 3
Tax Incidence and Efficiency Loss
Tax Incidence - final resting place of a tax
Elastic Demand
Tax Incidence and Efficiency Loss 2
Qualifications
Tax Incidence and Efficiency Loss 3
Sales
Probable Incidence of U.S. Taxes2
Federal Taxes
The US Tax Structure