Understanding Key Economic Concepts: Taxes, Public Goods, and Costs

Posted on Jan 10, 2025 in Economy

1. Externalities: Examples

Externalities are external effects that impact the production or consumption of goods by third parties and are not transmitted via prices. They can be positive or negative:

  • Positive externalities: Examples include health and education.
  • Negative externalities: For instance, when someone smokes, others have to endure the smoke without smoking.

When negative externalities exist, the social cost is higher than the private cost of the activity (production or consumption).

2. Public Goods

To understand what constitutes public goods (note that public goods are not the same as public services), it’s essential to grasp two principles:

  • Principle of rivalry in consumption: When one person consumes a good, it reduces the amount available for another consumer.
  • Principle of exclusion: It’s possible to exclude individuals from consuming a good by setting prices.

Based on these principles, we classify goods as:

  • Private goods: Products we buy at the supermarket.
  • Impure private goods: Enjoyment of a concert.
  • Impure public goods: Health, education.
  • Pure public goods: National defense.

3. Main Direct Taxes

Direct taxes are personal and subjective, considering the taxpayer’s circumstances. They are levied directly on individuals or companies and tax income (either holding or obtaining income). Major direct taxes include:

  1. Personal Income Tax (PIT): A direct and personal tax, it’s the most important resource for the public sector’s redistributive capacity and is not a neutral tax.
  2. Corporate Income Tax: A direct, personal, synthetic, and proportional tax on income obtained by legal entities.
  3. Wealth Tax: A direct and personal tax levied annually on net assets.
  4. Gift and Inheritance Tax.

4. Public Revenue

To cover public sector expenditures, resources are needed. These revenues are obtained through various means:

  • Establishing prices for the use of public facilities.
  • Mandating the payment of taxes.
  • Profits from public companies.
  • Sale of assets (privatization).
  • Issuing public debt.

Classifying public revenues is complex, with no single method. Three common criteria are:

  1. Degree of joint work of earnings:
    • Voluntary income (e.g., museum admission, donations).
    • Coercive revenue (taxes, with or without fees, public prices).
  2. Economic nature: Income account, capital account, financial account.
  3. Method of production: Ordinary income (e.g., PIT), special income.

5. Taxes vs. Special Contributions

  • Tax: Paid only when one wants to benefit from a public sector service; it’s not a regular income and involves a direct exchange for a service.
  • Special contributions: The taxable event is the increase in value of an individual’s asset due to a public action, contributing to the benefit received.

6. Short-Run Costs

In the short run, some costs are fixed, and some are variable. Total Costs (TC) are the sum of Total Variable Costs (TVC), which depend on production volume, and Total Fixed Costs (TFC), which are independent of production levels.

  • Average Total Cost (ATC): Cost per unit of production, calculated as TC divided by the quantity produced. The short-term ATC curve is typically U-shaped.
  • Average Variable Cost (AVC): Variable cost per unit, calculated as TVC divided by the number of units produced.
  • Marginal Cost (MC): The extra cost of producing one additional unit, calculated as the change in TC divided by the change in quantity.