Transcript المسكن - psclg

The Development of
Public Sector
Public Finance 5
Fiscal Neutrality and
Economic Efficiency
• Neutral Fiscal system that provides collective
goods and services “efficiently”.
• Efficiency means that there is nothing provided by
the government with which to compare in the
market.
• Example: if no police services were provided by
government , private people would change there
behavior by hiring more private detective.
Fiscal Neutrality and
Economic Efficiency
• If the fiscal system provide collective goods
without any social purpose, the market
analogy come to mined.
• We may begin in this way to get better ideas
of what is meant by “ efficiency”.
Market efficiency
• We say a commodity is efficiently produced
if the price reflect the marginal cost .
• Example: a pair of shoes is priced at SR250
and marginal cost equal SR250, the
consumer who purchase shoes is “directing”
the economy to devote resources to shoes
production which could, otherwise , be used
to produce SR250 worth in alternative
employment.
• Should the price be SR300,we could say that the
consumer is not confronted with “true” alternative.
• The shoes are not provide “efficiently” unless the
price SR250.
• Marginal Rate of substitution among goods in
consumption (MRSc) equal to Marginal Rate of
substitution among goods in production (MRSp).
• If this condition is not satisfy , it can be shown
that that at least one person in the group can be
made better off without any one else in the system
being made worse off by some rearrangement.
• The collective good is indivisible and therefore can not be
priced.
• The market analogy can’t be fully applied, if it could be ,
there would be no need for government.
• Some method of financing such services or distributing the
cost, this is the conceptual origin of the tax system.
• The marginal rate of substitution among both private and
collective goods in consumption are equal to the marginal
rate of substitution among both private and collective.
• For a single collective good , an “efficient” total quantity is
provided when the aggregate marginal evaluation of that
good by all citizen is equal to the marginal cost.
Example
• Two fisherman Moahammed and Ali
• The decision they confronted is
• whether to build fishing net (collective good) 10
feet long or 12 feet long.
• The difference in the total cost of building the two
net is 6 days labor.
• Mohammed estimate the additional length (2feet)
to be worth 4 days labor to him,
• If Ali consider the larger net to be worth , as much
as 2 days labor time, the “collectivity” should
decide to build the net.
Aggregative Marginal Condition
& Individual Marginal Condition
• With the provision of collective good , the first of
these condition may be satisfied without the
second.
• If the combined marginal evaluation of added
length exceeds 6 days the incremental should be
made on aggregative efficiency ground
• That is , regardless of the distribution of the
“taxes” among them.
Neutrality & Full neutrality
• Neutrality Is present in one sense , when
aggregative marginal condition is met
• Full neutrality is not present , until and
unless each person has assigned to him a
share in the cost that is equal to his own
marginal evaluation.
Fiscal neutrality:
A geometric Analysis
• A two consumer model
SUM of ME
MEA
MC
TA MEB
TB
X
Sum of ME=MC
Wicksell’s Principle of Taxation
• To organize an efficient fiscal system
• First: Tie each decision on public
expenditure to a decision on the distribution
of the tax burden.
• Second: Majority rule to be replaced by
some rule of relative unanimity (5/6)
Second Order Efficiency
• The fully “efficient” fiscal system serve as a norm When
the system devoted to provision of collective good for
allocation function exclusively. However, Societies have
shown a willingness to sacrifice “efficiency” to employ
the fisc for redistribution of income.
• Taxes and spending are not related in decision making.
• If an individual is faced with a tax bill that does not reflect
his own marginal evaluation of the increment of public
services being financed , this tax charge takes on the
characteristics of a net withdrawal of real income.
Second Order Efficiency
• The norm of “least price distortion” requires
that the tax system be designed to minimize
the welfare loss resulting from any
inefficient choices caused by tax-induced
changes in the structure of relative price.
• The more general the tax , the less it will
interfere with individual choice.
What implication arise from the
principle of “least price distortion”
• The Lump-sum tax: a tax levied upon the individual
independently of his income.
• The general proportionate income tax: The individual is
attracted to consume more leisure than without tax.
• The general sale tax: if levied on the whole range of
commodities is to be preferred over the tax which
concentrate on few commodities.
• The lump-sum subsidy: Effect on the expenditure side are
similar to those on the tax side.
The conception of
general expenditure
• The “least price distortion” has been applied
to tax distribution , but not to the
distribution of public expenditures.
Equity and Efficiency
• Equal treatment for equal: has been applied to the
distribution of taxes , but not to the distribution of
expenditure.
• It serve to prevent differential effect on separate
group and individual.
• The meaningfulness of the equity principle
depends on the way in which “equals” are defined.