Chapter Review: Key Points. 1 The economic goals of government are to: (a) provide a stable legal environment, promote compaction

1 The economic goals of government are to: (a) provide a stable legal environment, promote compaction, and provide efficiently for public wants, (b) stabilize income, employment, and prices, and (c) redistribute income and wealth equitably.

2 When marginal social benefits and marginal social costs diverge market failure occurs. In such cases, government may be used to provide the socially optimal quantities of some goods and to limit economic bads.

3 Externalities occur when private calculations of benefits or costs differ from the benefits or costs to society because third parties gain or lose from a transaction.

4 Nonrivalry means that a good is not used up when any individual enjoys it; a beautiful sunset is an example. Nonexclusion means that it is prohibitively expensive to deny access to a good. Note, however, that public provision does not require public production. Private firms often produce goods that government then distributes.

5 A good that is both nonrival and nonexclusive is a pure public good. Public goods will be less than optimally provided by the market system, if provided at all, because of attempts to free ride. A rival but nonexclusive good embodies externalities that often hinder the efficiency of market solutions.

6 The demand for a pure public good is the vertical summation of individual demand curves since all can enjoy the good simultaneously, while demands for private goods are summed horizontally. Adequate revenue for optimal quantities of public goods is generated if people pay taxes equal to their marginal benefits multiplied by the amount of public good provided.

7 The benefit principle of taxation suggests that people should pay taxes in proportion to the marginal benefits they receive from a governmentally provided good.

8 The ability-to-pay principle of taxation requires taxes in proportion to people's income, wealth, or possibly, their consumption. This principle is closely related to the idea that government policies should move the income distribution closer to equality than the market distribution of income.

9. The principle of horizontal equity suggests that equals should pay equal taxes; vertical equity requires higher taxes on the wealthy than on the poor.

10 If the loss to a taxpayer exceeds the government revenue gained, there is an excess burden of taxation. Neutral taxes impose only income, not substitution, effects and impose no excess burdens.

11 The personal income tax system is nominally progressive, but various loopholes make it somewhat inefficient and inequitable.

12 Social Security taxes are the second largest and fastest growing sources of federal revenues. They and other payroll taxes may be borne primarily by workers. Moreover, they are regressive, typically declining proportionately as personal income rises.

13 Sales taxes are reasonably efficient but, like income taxes, are marred by numerous exemptions. Many excise taxes apply to "sin" or " wasteful luxuries. " Unless they are based on a benefit principle of taxation (for example, public zoo ticket fees or gasoline taxes), they tend to cause inefficiency and be regressive. (Poor people smoke and drink as much, by volume, as rich people.)

14 The corporate income taxdiscriminates against the corporate form of business and against the goods produced primarily by corporations. In the long run, most of this tax is probably forward-shifted to consumers. Thus, in the minds of most experts, this tax tends to be both inefficient and inequitable.

15 Property taxes provide disincentives for improvement and are blamed by some for the deterioration of central cities.

16 Inheritance and gift taxes have high and progressive rates, but can be avoided because they are riddled with loopholes.

17 A value-added tax (VAT) is similar to a sales tax in that it is forward-shifted. VATs only apply to the value added by each firm. VATs, flat rate taxes, and progressive consumption taxes (not income) have been proposed as replacements for corporate income taxes or Social Security taxes. (3880 digits)

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