3.

2 Types of goods
(Mankiw Ch. 11)
Markets and the type of goods

Markets are well-suited to supplying private goods, i.e.,

those which are rival in use and exclusive.
Rivalry (or subtractability)
•Criterion: Does one person’s use of the good diminish
another’s enjoyment of it?
•e.g., shower vs. Olympic-size swimming pool
•affected by the degree of congestion
•but also rules of behaviour (institutions)
Exclusion
•Criterion: Can others be prevented from using the good
as one uses/enjoys it?
•e.g., bottle of soda vs. street-lighting; cable broadcast
vs. radio broadcast
technological/physical: is it feasible to exclude others or not?
(e.g., a fence)
institutional: what is the last resort when technological
barriers are breached? (e.g., trespassing as a crime)
A typology of goods

Excludable Nonexcludable Elinor Ostrom

Rival Private good Common resource

Nonrival Club good Public good

A typology of goods

Elinor Ostrom
Private goods Haircut; plate of rice; book; pen
Street lighting; natural park;
Public goods uncongested urban road
Internet connection; Netflix; SLEX
Toll or club goods use; time-share condos
oceans and lakes; crowded
Common resource sidewalk
Question
•The economic problem of (what, how, and for whom)
to produce consists of deciding which institutions are
to be assigned to provide various types of goods
•Think of markets, the family, the community, and the
state
Public goods
•Suppose it costs ₱100,000 for a town to put up a
fireworks display, while the value to each person of
watching it is ₱600. If there are 500 residents, then the
benefits are greater than the cost (₱300,000 >
₱100,000).
•Is it likely for this service to be provided by the market?
(E.g., by selling tickets to the event?)
Public goods
•A free-rider is one who receives the benefit of a good but
avoids paying for it.
•Essentially an externality: no one will provide the service
because the total cost is less than the private benefit, even if
it is socially beneficial, because other people will not pay for
it but will enjoy it if provided.
•Typical solution: government pays for the service out of
general taxes.
Public goods game and the free rider
•Three players start out with 20 pesos each.
•Whatever they contribute to a common pot grows by a
multiple of 2 and the result is divided among them.
•They get to keep whatever they don’t contribute.
•The obvious dominant strategy is not to contribute at all, i.e.,
to become a free rider.
•As a result, the Nash equilibrium is for no one to contribute.
Public goods game and the free rider
A
A 20 20 27

20 B
B 20 40 x 2 = 80 27

0
C
C 20 27 + 20
Public good problem
Price
S
Because of the free-rider
problem, the good is
not supplied privately.
Social gain

But social valuation actually

exceeds minimum supply price.

DA+B

DA DB
QM QS
Quantity
Short note on the algebra
Note the social demand for a public good is obtained by adding individual
demand curves upwards – because the same quantity of public good can be
consumed simultaneously by any number of people.
This is unlike the market demand curve for private goods, which adds the
individual demand curves horizontally.
Let individual demand curves for a public good be
Q = a – bp and Q = A – BP.
Rewrite these as
p = – Q/b + a/b P = – Q/B + A/B.
Then solve for p + P = PS as a function of Q.
Examples of public goods
national defence
basic research in science*
fire protection*
street lighting
weather-forecasting
monitoring and protection against earth-destroying
asteroids
space exploration*
*provided to some extent by private actors
Public goods and positive externalities
A public good is essentially an extreme form of positive externality.
A positive externality is a nonexclusive, nonrival good which is provided
at least partially by private parties (e.g., a philanthropic provision of
vaccines, basic research supported by firms, or voluntary firefighting).
The typical solution to inadequate provision of public goods is taxation,
to overcome the free-rider problem, combined with government
paying for the provision of the good.
Club goods
What happens if the “public good” becomes exclusive, i.e., it is now
possible to restrict the enjoyment of the good?
The result is that the curve A+B becomes effective, since the free-rider
problem is solved.
admission fees to a large swimming pool; golf and country clubs; jazz concerts; cable TV;
Internet broadband; toll highways.

So the main distinction between a club and public good is the

possibility of excluding and requiring payment. Depending on the
costs, this means club goods may be provided by the for-profit sector.
Common-pool or open-access resources
What happens if a public good becomes rival? Then it becomes a
common-resource: nonexclusive but rival. (Alternative names are
“common-pool resource” or “open-access resource”.
Examples:
Heavily used urban roads and sidewalks
Heavily exploited previously pristine rivers and lakes
Natural reserves , e.g., forests
Migration routes and spawning locations of fish in open oceans
Common-pool or open-access resources
It is profitable for fishpen owners to keep the largest
stock of tilapia in their fish pens in a lake to
maximise their harvest and profits.
But there is nothing to restrict everyone from doing
the same thing since the lake is nonexclusive.
Overstocking fish pens in the lake, especially in
summer heat, deprives fish of oxygen.
When everyone does the same thing, the result is a
fish kill that harms all fishpen owners.
Classic case of a Tragedy of the Commons.
“Tragedy of the commons”

Don’t overstock Overstock

Don’t overstock 4, 4 0, 5

Overstock 5, 0 0, 0
Common-pool resources
The overuse of common-pool resources can be interpreted as
a form of negative externality.
The actions of one has a negative (unpriced) impact on the
welfare of others, and vice versa.
Hence the problem is also susceptible to private or public
solutions of externalities
Common resources
Solutions need to address the exclusion problem: hence
important to define property rights
• State ownership: but typically ineffective, because the state is not
an effective owner, especially in developing countries
• Corporate ownership or private-monopoly concession: but often
viewed as inequitable
• Governance by local community or association (Ostrom): a third
alternative?
Common resources
Why communities can work in solving common-resource problems.
• Frequent and multifaceted interaction among members today and in the
future creates a strong incentive to act in socially beneficial ways (e.g. hiya and
loss of reputation).
• Same frequent and multifaceted interaction allows members to gather
information about each other, e.g., characteristics, recent behaviour, and likely
future actions.
• Free-rider problems and antisocial behaviour can be directly punished (e.g.,
exclusion in credit associations for erring members, or “shunning” in the case
of some religion-based groups.) (See Bowles [2004: 490].)
Community governance: zanjera of Ilocos Norte:
Community governance: Wikipedia
A variety of organisations for different
types of goods
Private goods

For-profit
entities
Club goods

State
Common-pool
resources

Communities
Public goods
3.3 The tax system
(Mankiw Ch. 12)
Various kinds of taxes
1. Lump-sum taxes: levied on persons based on their specific
characteristics.
2. Commodity taxes: levied on specific commodities
2.1 specific taxes: differ based on commodities involved, e.g.,
alcohol, tobacco, sugary drinks
2.2 value-added taxes: a uniform rate based on the value-added
content in a good (wages, profits, rents)
2.3 tariffs: applicable only to imports. (Export taxes used to exist
but are no longer in vogue.)
Various kinds of taxes
3. Income taxes: levied on persons based on incomes earned.
Taxes on compensation income (wages, salaries,
Taxes on passive incomes (interest, dividends, etc.)
4. Consumption taxes: levied on spending.
If a value-added tax covers all goods, then it is equivalent to
proportional tax on spending
5. Wealth and inheritance (estate) taxes: based on what one
owns.
Efficiency
Taxing anything means less of it will be produced and
consumed. (Acceptable in the case of goods with negative
externalities.)
But others can have disincentive effects:
Example: If income is taxed heavily, then less effort will be
forthcoming. (Less true for wealth and inheritance taxes.
Why?)
Equity
Horizontal equity: people in approximately the same situation
should be taxed approximately equally
E.g., an employee earning P80,000 annually, and a self-employed person
earning the same amount.
Vertical equity: wealthy people should pay more.
Benefits principle: people should pay based on the benefits they receive
from government .
Ability-to-pay principle: people should pay taxes according to how well
they can shoulder the burden.
Progressive, regressive, proportional taxation

Proportional: proportion of income paid as taxes is constant,

as income increases.
Regressive: proportion of income paid as taxes falls, as income
increases.
Progressive: proportion of income paid as taxes increases, as
income increases.
Progressive, regressive, proportional taxation
Income Progressive Proportional Regressive
120,000 12,000 (10%) 12,000 (10%) 12,000 (10%)
500,000 100,000 (20%) 25,000 (10%) 50,000 (5%)
1,000,000 300,000 (30%) 33,000 (10%) 100,00 (3%)
Progressive, regressive, proportional taxation
Tax rate
Tax due
Progressive
Progressive
Proportional

Regressive
Proportional

Regressive

Income Income
Personal income tax schedule
Tax due and average tax rates by (net) taxable income (in ₱000)
Tax due
The structure of personal income
taxation in the Philippines is progressive

Tax rates
Tax structure in the Philippines

Source: https://www.oecd.org/tax/tax-policy/revenue-statistics-asia-and-pacific-philippines.pdf
Philippine tax structure (2020) in comparison

Source: https://www.oecd.org/tax/tax-policy/revenue-statistics-asia-and-pacific-philippines.pdf
Tax structure in the Philippines
• Taxes are about 18 percent of GDP (2020).
• The biggest share comes from the VAT (3.8% of GDP or 22% of taxes)
• Next biggest is corporate income tax (3.6% of GDP)
• Third is personal income taxes (2.6% of GDP, or 14% of taxes)
• In comparison, richer economies derive a larger share from personal
income taxes (23% of taxes) and a smaller share from corporate
income taxes (10% of taxes).
Source: https://www.oecd.org/tax/tax-policy/revenue-statistics-asia-and-pacific-philippines.pdf
Tax structure in the Philippines
• The larger share of commodity taxes and VAT offsets the progressivity
of income taxes in the Philippine tax system.
• Horizontal equity is diminished by poorer treatment of compensation
income (wages and salaries) and passive income (interest, dividends)
and professional income.
• On the other hand, to the extent there are large transfers to the poor
(e.g., 4Ps, ayuda, etc.) the progressivity of the system is somewhat
restored.
Progressivity is reduced by indirect taxes
Income Rate Tax due Indirect Total Total rate
(%) tax tax (%)
500 5 25 175 200 40
1000 20 200 175 375 38
5000 30 1500 175 1075 34
3.4 Redistribution and land reform
3.4 Redistribution and land reform
Basic insight: poverty and inequality are negative externalities in
society that justify government intervention.
• Purely private actions lead to results (concentration of wealth and
inadequate livelihood for sections of society) that have collectively
negative consequences, e.g., resentment, social division, rebellion.
• Aside from pragmatic arguments, however, an argument based on
simple social justice, human dignity, and development.
• Essentially the same arguments that justify progressive income
taxation, wealth taxes, and income transfers.
3.4 Redistribution and land reform
Long-standing focus on agriculture where a large portion of the poor are to
be found:
• Prohibition of tenancy and conversion to leaseholds
• Land-to-the-tiller programmes in rice and corn (Macapagal to Marcos):
government buys out large landlords and redistributes these to small
farmers who need to amortise loans)
• Comprehensive agrarian reform expands scope to all agricultural lands (esp.
coconut, sugar, other plantations) (Aquino I and later).
• Slow implementation and extended several times (4 decades):
longest-running agrarian reform in the world.
3.4 Redistribution and land reform
Why agrarian has not delivered on its promise of raising incomes and
alleviating rural poverty:
• Weak property rights (cf. Fabella) discouraged investment and lowered
productivity, e.g., reformed lands cannot be used as collateral for loans for
working capital.
• Protracted process has led to redivision and subdivision among agrarian
reform beneficiaries and heirs so that farms become smaller in size.
• Restrictive rules on land sales and land size prevent transfer to more
efficient farmers.
3.4 Redistribution and land reform
Results:
• Low productivity and incomes mean the incentive to engage in
agriculture is greatly reduced.
• Labour force transfers out of agriculture into services. Agriculture
now employs only 23 percent of labour force.
• In practice, rural families have benefited more from widespread
education than land reform.
Employment in agriculture
End