Macroeconomics for forex traders – Government – Expenditures Taxes and Debt

Externalities:

Private and Public Goods:

Private goods and products are those products that are purchased and consumed by an individual and as it is consumed therefore other individuals cannot consume that particular product. Therefore in economic language it can be stated that the consumption of a particular private good is associated only with the individual who actually has consumed that product and other individuals who do not have consumed that product are excluded from the consumption of the private product. The private products are therefore regarded as excludable and rival as the consumption of these products is exclusively associated with the individual who has consumed it.

Public goods on other hand are those products that can be consumed by multiple individuals. One individual consumes a public good but this consumption does not affect the availability of the product to other individuals. Therefore in economic accounting no one is excluded from the consumption of these types of products. This is the reason why economists regard these products as non excludable and non rival products. The example of public goods may include; public parks, national radio or television channel, road network, streets, defense system etc. As mentioned that no one is excluded from the consumption of public good, even if an individual does not consume it, therefore, free rider problem is faced. Free rider problem refers to economic problem that is created by the imbalance consumption of public goods by individuals of an economy.

Taxes:

In order to generate revenue and to regulate externalities governments use the weapon of taxation. In case of externalities, governments can apply taxes on negative externalities. The taxes can be classified into two different categories, i.e. marginal tax rates and average tax rates. Marginal tax refers to the rate of tax that is applicable to the very last unit of money earned, whereas, the average tax rate refers to the average rate of tax that is applicable to total taxable income. The implication of taxation and government expenditure is monitored through fiscal policy.

Debts:

The government avails the debt when spending are more than the revenue generated through taxes and other sources. The government debts represent government’s future expenses that would be met through this debt. The repayment of these debts is made by the application of excessive or levy taxes. The major source of debt repayment is tax therefore if the government avails debts it may cause problems for its people by increasing the rate of taxes. The government debts can cause problem by either creating a crowd out effect or through dead weight loss of future taxes.