Question

Read the response below. Do you agree with the response below? Why or Why not, Explain.

The benefit-received principle of taxation asserts that households and businesses should purchase the goods and services of government in basically the same manner in which other commodities are bought. It follows the same principle as the market - the individuals who receive the benefit of a good or service should pay the tax necessary to supply that good or service. For example, gasoline taxes are typically earmarked for the financing of highway construction and repairs. Those who benefit from good roads pay the cost of those roads. On the surface, this principle is quite logical and easily justified. The people who benefit from public goods are logically the ones who should pay for their provision. Drivers should pay for highways, library patrons should pay for libraries, students should pay tuition, camping enthusiasts should pay for national parks, and the list goes on. However, the benefit principle does not work well for the efficient provision of public (and near-public) goods. Due to nonrival consumption, such goods are efficiently allocated with a zero price. If those who benefit directly from a public or near-public good pay a price equal to the value derived, as would be the case for private goods, then the quantity demanded declines and so too does the overall level of benefit generated. This is not efficient.

Answer 1

The opinion mentioned in the paragraph above is correct. The benefits received principle states that each person should pay the price of public good in accordance with the benefit derived from the consumption of the public good. Thus, persons deriving greater benefit from the consumption of the public good will pay greater prices. However, it is very difficult to measure the benefits derived by each person from the consumption of the good because people generally undervalue the benefits to pay less and be a free rider in this case. Thus, efficient quantity of the public good cannot be provided as each wants other to pay for the good and be a free rider and enjoy the benefits of the public goods without paying for it.