Free-rider problem:In the case of a public good, some members of the community know
that they can consume the public good while others provide for it. This results in a lack of
private funding for the good and requires that the government provide it.Spillover benefits:Additional benefits to society, not captured by the market demand
curve from the production of a good, result in a price that is too high and a market quan-
tity that is too low. Resources are underallocated to the production of this good.Positive externality:Exists when the production of a good creates utility (the spillover
benefits) for third parties not directly involved in the consumption or production of
the good.Spillover costs:Additional costs to society, not captured by the market supply curve from
the production of a good, result in a price that is too low and market quantity that is too
high. Resources are overallocated to the production of this good.Negative externality:Exists when the production of a good imposes disutility (the spillover
costs) upon third parties not directly involved in the consumption or production of the
good.Egalitarianism:The philosophy that all citizens should receive an equal share of the
economic resources.Marginal Productivity Theory:The philosophy that a citizen should receive a share of
economic resources proportional to the marginal revenue product of his or her productivity.Marginal tax rate:The rate paid on the last dollar earned. This is found by taking the ratio
of the change in taxes divided by the change in income.Average tax rate:The proportion of total income paid to taxes. It is calculated by dividing
the total taxes owed by the total taxable income.Progressive tax:The proportion of income paid in taxes rises as income rises. An example
is the personal income tax.Tax bracket:A range of income on which a given marginal tax rate is applied.Regressive tax:The proportion of income paid in taxes decreases as income rises. An example
is a sales tax.Proportional tax:A constant proportion of income is paid in taxes no matter the level of
income. An example is a “flat tax” or the corporate income tax.Gini ratio:A measure of a nation’s income inequality. This measure uses a scale between
zero and one. The closer it lies to zero, the more equal the distribution of income.164 › Step 4. Review the Knowledge You Need to Score High
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