[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

are called merit goods. Such merit goods (and bads) need to be distinguished from
externalities: no one else may be harmed by someone smoking marijuana, yet many
governments make it illegal. Moderate drinking or cigarette smoking may have an
adverse effect only on the drinker or smoker, yet government still tries to discourage
the consumption of alcohol and tobacco through high taxes. In these instances,
the government interferes with the general principle of consumer sovereignty,
which holds that individuals are the best judges of what is in their own interests and
promote their own well-being. The government acts paternalistically. Many economists
believe that government should limit such behavior to its oversight of minors—
few object to compulsory education requirements for children but many question
whether government should dictate what adults should or should not do, so long as
their actions do not cause harm to others.
WRAP-UP
REASONS FOR GOVERNMENT INTERVENTION
IN THE ECONOMY
To correct market failures: Market failures such as externalities provide a rationale for
government intervention, which aims at improving economic efficiency.
To pursue equity: Market outcomes, even when they are efficient, might fail to
satisfy social standards of equity. Government may intervene to redistribute
income.
To promote and discourage merit goods and bads: Sometimes government imposes
social values, by mandating the consumption of merit goods (education) and
prohibiting the consumption of merit bads (illicit drugs).
EQUITY-EFFICIENCY TRADE-OFFS
We have seen that government programs have multiple objectives. If the only task
of the government were to address market failures, it would face difficult technical
issues—for instance, how best to reduce pollution. But the hardest problems are
those that involve trade-offs, especially between improving the efficiency of the
market and promoting equity. Equity—a sense of fairness—might suggest that the
rich and wealthy should contribute not only more to support the government but
proportionately more (i.e., a larger fraction of their income). The United States has
a progressive income tax system that is designed to do exactly that; tax rates for
higher-income individuals are set above those for lower-income individuals.
(Conversely, tax systems in which the poor pay a higher proportion of their income
to the government are regressive.) The inefficiencies associated with such taxation
arise from the marginal tax rate, the extra tax that an individual pays on the
last dollar earned. If the marginal tax rate is high, incentives to work harder are
380 ∂ CHAPTER 17 THE PUBLIC SECTOR