Friday, November 18, 2011

fees and taxes, they are all the same

Fees, Taxes, They Are All The Same

Externalities are very common to an individual, and even more so to a college student. Every college student pays certain fees that support all sorts of different campus functions like student recreation centers and waste recycling. These functions were established under the premise that they will provide benefits to students and that is why the students are required to pay for them. The issue with this is that not all of the students use these services or ever wanted to, meaning they are required to pay for goods and services that they have not reaped the benefits from.

This is to me a negative externality, since the cost is shouldered by the entire student body and the entire student body does not partake in these activities. That means that those students who do not take advantage of the goods and services they are made to pay for suffer, since they received essentially nothing for the money they were required to pay. This negative externality is odd because it is a direct cost that is mandatory, but use of the product or service is not used. Since usually a negative externality is seen as a transaction that has costs borne by a third party, many do not think of negative externalities of mandatory fees.

These fees act like taxes, and to an extent they are. Taxes are placed on peoples within the governing body’s jurisdiction to pay for the services and products that the government provides them with. Since there is no guarantee that these will be utilized by all of the people who pay their taxes, the people who cannot or do not use them are essentially throwing their money away.

To some their utility function might make them feel happy about paying taxes and some might even be so generous as to gain utility from paying for services they know will only be used by others. But even if this is so, it does not account for the fact that many are unaware of how much they are actually paying to support things they do not consume. It is this unawareness that plays to the favor of those that do use the product. Since they are able to share the costs with people who are not consuming the product, they are able to pay a much lower price than what they would actually pay if only consumers of the product were to bear the cost.

This is a double edged externality sword. The positive externality of the uneducated tax payer paying for goods and services they do not use it that the consumer of said goods is able to gain the benefits they provide at a lower cost to themselves. On the other hand, since the cost is shared by consumers and non-consumers alike the non-consuming tax payer suffers a loss. This phenomenon is seen in all sorts of governing, and explains why programs that only allow some to receive benefits while others are excluded are in essence defunct. Things like welfare are not fair at all to the majority of tax payers who are not allowed to reap the benefits of these programs because they do not meet the criteria to do so.

The hopes behind this are that if everyone helps pay for a service (even those who don’t use it), those who use the service will be able to gain enough from it to make it worthwhile. The fallacy behind this is that if people are made to pay for something they don’t want or use then it is not mutually beneficial and in a sense destroys wealth. In the few situations where other positive externalities come into play to make up for the loss suffered by the non-users (things like roads, fire departments, and public safety) then they can be economically feasible. All programs in government should be this way, to provide overall more benefits to the governed than costs, and when they do not it will only serve to destroy wealth.

1 comment:

  1. I think you must make a difference between a public good and externalities. It seems to me that most of your examples are examples of public goods. Public goods that are non-excludable (and non-rival, when we talk about pure public goods). The idea behind those fees or taxation is that because they are non-excludable people have no incentives to pay for them, therefore, in the extreme case, the market will not produce the good or underproduce the good. Therefore, the solution is to tax people or impose a fee on students. The fees you are being imposed are theoretically imposed upon you because they are "public goods." There are obviously many examples where actually these goods that the market would not provide because they are non-excludable are actually being provided by the market. Ronald Coase wrote a famous essay called "The Lighthouse in Economics" (Journal of Law & Economics, 1974, Volume 17, No. 2, pp. 357-376) showing that historically some lighthouses were owned privately despite the economic theory arguing that the lighthouse is an example of public good.
    The question that one should ask is "are the benefits provided by these public goods exceed the costs of provided these public goods via taxation or fees including the opportunity cost?" I can't pretend I have read all the economic literature but I can't remember any analysis trying to answer that question. Most economists just assume that people want these public goods but are not willing to pay for them because other will benefit without paying from it. I think that assumption is a very strong one.