Questions Week 5 - Essay Example

Private goods’ consumption is excludable and rivalry, therefore free riding is not possible in its case. 6. Consider a trout stream that is threatened with destruction by a nearby logging operation. Each of the 10,000 local fishers would be willing to pay $5 to preserve the stream. The owner of the land would incur a cost of $20,000 to change the logging operation to protect the stream. It will not be preserved. The land owner does not benefit from existence of the stream at present. His cost of protecting this stream is $ 20,000, so he will not protect the stream out of his individual capacity.

Major administration effort will be required. All fishermen who are willing to pay for a license for fishing shall be allowed to fish in the stream; once a number of fishermen, say ‘n’, be found, each shall be charged $ 20,000/ n for all the licenses, the money can be given for changing operation to protect the stream. We need to know how much revenue may be raised by levying a tax. A broader tax base would mean that the same amount of revenue can be earned with lenient rates. Goods with elastic demands when taxed have lower capacity to earn revenue in comparison to tax revenue from un-elastic goods.

Direct taxes such as the income tax or tax upon necessary items such as food or fuel is likely to add greatly to the revenue. We also assess how equitable is our tax to the population. Is it affecting all the people or some specific group? To keep the tax vertically equitable, we make sure income tax is progressive. That is it rises with increase in income. To keep them horizontally equitable, we make sure that people with one level of income pay the same proportion of it in taxes, no diversity between equally well off people.

Ability to pay as well as the benefits received by the tax payer shall be taken into consideration before