Lesson 4 The role of government

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Lesson 4

The role of government

Lesson 4 The role of government

1. You can explain why collective goods can lead to market failure through the free-rider problem.  

2. You can analyse why governments use taxation to finance collective goods and influence economic behaviour.  

3. You can explain how the Dutch Box 1 income tax system works, including progressive tax brackets and the role of tax credits.  

4. You can evaluate the trade-offs between efficiency, equity and individual incentives when governments use taxation to correct market failures. 

The students of MYP request Johan de Witt to build 'a chill area' only for MYP students. This area will include:

• Comfortable lounge chairs

• Music

• Snacks

• Phone-charging points

• Some game

  
  

Rules

• The total cost is €5000.

There are 100 MYP students at Johan de Witt.

The school says:

“We will only build the chill area if the 100 students together contribute at least the €3000.”

Each student therefore has to decide whether to contribute €50.

You can choose:

A. Pay €50

And hope enough students pay so the chill area is built for all MYP students to use.

• B. Pay €0

  You don't pay €50. If enough other students pay, the room will still be built for you to use the area.

• 
  

Lets say the school forces the students to pay enough money to build the chill room.

Is the school actually solving a market failure, or is it simply forcing students to pay for something they may not want?

When should a collective good be provided collectively, and who should pay for it?

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Why might a market provide too little national defence but plenty of cinema tickets?

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Free-rider problem

An economic and social issue where people benefit from a good or service but do not pay for or contribute to it.

The market fails again

Collective goods

A collective good has characteristics that make it difficult to exclude people from its benefits, and one person's use does not necessarily reduce the amount available to others.

What can a government do to mitigate this problem?

• Collective coercion (usually through taxes)
  

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Taxes are not only a way of raising government revenue. They can also influence behaviour and redistribute income.

For example

Box 1 of the dutch tax system

Box 1 Income from Work and home

True or false?

Earning €100,000 mean that the person pays 49.5% tax, so after has €50500 left

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Calculate how much tax each person has to pay.

Person A earns €30,000 taxable income.

Person B earns €60,000 taxable income.

Person C earns €100,000 taxable income.

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What does the structure of the tax system tell us about how Dutch society distributes the tax burden?

• Progressive tax system

Lorin – Efficiency

"High marginal tax rates may reduce the incentive to work additional hours or take on additional income."

Yulia – Equity

"People with higher taxable incomes can contribute a larger share toward collective goods and government services."

Sude – Government

"The government needs revenue to finance collective goods and public services."

Should higher-income earners pay a larger percentage of their income in tax?

Each student must:

1. make one argument;

2. respond to another student's argument;

3. identify one possible unintended consequence.

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Your country needs €100 million to finance collective goods. It wants to reduce inequality but also wants people to have strong incentives to work.

You must design a tax system by choosing one of the following options:

Option 1

Everyone pays 20%.

Option 2

First €40,000 → 20%
€40,000–€80,000 → 30%
Above €80,000 → 45%

Option 3

First €40,000 → 0%
€40,000–€80,000 → 30%
Above €80,000 → 50%

Students answer:

Which system would you design and why?

But the advanced requirement is:

Identify one advantage and one unintended consequence of your own system.

Which system would you design and why?

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Identify one advantage and one unintended consequence of your own system.

Option 1

Everyone pays 20%.

Option 2

First €40,000 → 20%
€40,000–€80,000 → 30%
Above €80,000 → 45%

Option 3

First €40,000 → 0%
€40,000–€80,000 → 30%
Above €80,000 → 50%

Check

1. A collective good can create a free-rider problem because...

2. The government can respond to this problem by...

3. Box 1 is progressive because...

4. One possible trade-off of progressive taxation is...

5. This connects to the question "How are societies governed?" because...