1 How can the government best determine the respective deman

1. How can the government best determine the respective demand curves for each tax bracket when establishing contribution to the public goods?

2. Should the tax rate be individualized per tax bracket, or can you think of another way to establish the taxable rate across tax brackets?

3. Does the theory of non-exclusion and non-depletion, as outlined with respect to care for the poor as a public good, apply to the current healthcare debate?

Solution

Public Goods are goods or services that can be consumed by several individuals simultaneously without diminishing the value of consumption to any one of the individuals. For example education system.

Because of non excludibility nature of public goods, these goods may cause market failure. To which government intervention in necessary. With a free-rider problem, private firms cannot earn sufficient revenues from selling the public good to induce them to produce the socially optimal level of the public good.

The government can correct market failure and provide the socially-optimal level of a public good by financing the provision of public goods with tax revenue.

If the government seeks to provide the public good in a budget-balancing, or revenue-neutral manner, then the government needs to collect total tax revenue equal to the total cost of providing the public good. If there are n individuals in the society, then:

Total Tax = TC(X*) = Integration 0 to X* MC(X) dx

so that the tax per individual = TC(X*)/n.