14.01SC | Fall 2011 | Undergraduate

Principles of Microeconomics

Unit 7: Equity and Efficiency

Government Redistribution Policy

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Session Overview

A key element of government policy that determines how much we can redistribute among households is the tax rate. The tax rate is used to raise revenues, which can then be used in government programs. What type of taxes we should use and how high tax rates should be are major questions that economics attempts to answer. This lecture provides an introduction to the economics of taxation.

The Capitol Building, where the United States Congress proposes economic policy such as tax rates. Image courtesy of Ed Marshall on Flickr.

Keywords: Social insurance; asymmetric information; social security; moral hazard; EITC.

Session Activities

Readings

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

  • [R&T] Chapter 15, “Public Finance and Public Choice.”

Lecture Videos

Resources

Check Yourself

Concept Quiz

This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.

Question 1

What is one reason that a consumption tax may be preferable to an income tax?

It can be used to discourage consumption of certain goods. close
It encourages savings, and can be used to discourage consumption of certain goods. check
It encourages savings. close
It is regressive. close
Check Show Solution

The correct answer is a consumption tax encourages savings (by making consumption relatively more expensive), and it allows the government to discourage the consumption of certain goods (e.g., cigarettes or alcohol). These may be goods that have negative externalities, or goods that we believe people have difficulty in resisting and thus should be discouraged from eating. A consumption tax is also regressive, but we generally believe that this is a disadvantage, not an advantage, of a consumption tax.

Question 2

What is the definition of a targeted government benefit or program?

A benefit or program available to everyone. close
A benefit or program that is only available to those that need it, or those that meet specified criteria. check
A benefit or program that is regressive. close
None of these. close
Check Show Solution

The correct answer is a targeted government benefit or program is only available to those that need the program or households that meet specified criteria. A universal program is available to everyone (the opposite of targeting). A regressive program is one that benefits the rich more than the poor.

Further Study

These optional resources are provided for students that wish to explore this topic more fully.

Other OCW and OER Content

CONTENT PROVIDER NOTES
14.41 Public Finance and Public Policy, Fall 2010. MIT OpenCourseWare An in-depth course on the government’s role in the economy.

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Fall 2011
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