Welfare economics:

●​ Every commodity has not its market (in reality). There are their own markets in
theory. Adam Smith: Invisible hand.
●​ Property rights are important → the government provides law and order, a court
system, and national defense.

Contingency:

1.​ Market power: Monopoly and oligopoly → active Pareto efficient is hard.
○​ Monopoly and oligopoly market movement in course book. Market power is
also important.
2.​ Non-existence of market: Asymmetric information/poverty insurance has no market.
○​ Because firms cannot be incentivized to insure people with no private value
(unavailable privately).
○​ If there is no market for the good, the market cannot exist (from the firm side).
3.​ Externality: One person’s behavior affects the welfare (e.g., government poverty
insurance for homeless people).
○​ Negative externality example: Smoking in a room → creates negative
externality.

If there is externality, that means there is no Pareto efficiency.

Public Goods:

●​ Private marginal cost + social marginal cost = total marginal cost = price.
●​ Negative externality: Can’t restrict yourself from using the sea freely.

Public goods types should be known.

Positive Externalities:

●​ Wind turbines, renewable energy. It does not affect pollution and it gains energy from
nature and cleanliness.

Public Goods:

●​ Non-excludability (non-rivalry): Weather forecasts. If someone reaches information

about a rainy day, it doesn’t affect the other’s access to information.
Merit Goods:

●​ Healthcare services are examples of merit goods. The government can provide this
for us. If society gets better on the health side, it affects the country’s development.
For that reason, we can say healthcare services count as merit goods.

Government Intervention:

●​ The theory of welfare economics focuses on market failure and distributional

considerations as reasons for considering government intervention.

Market Failure:

●​ Imperfectly competitive markets (e.g., public goods and externalities).

●​ Production may decrease (monopoly and oligopoly).
●​ Consumers may lack sufficient information or be misled by advertising → asymmetric
information.

Key Concepts:

●​ Non-rival goods: Streetlights, national defense.

●​ Non-excludable goods: Lighthouse, clean air, clean water.

Externalities

●​ Market failure:
1.​ Market power: Oligopoly, monopoly.
2.​ Markets exist: Asymmetric information, public goods, merit goods,
externalities.

Externalities are another market failure that requires government intervention in the
economy.

An externality is the positive or negative impact of an individual’s or firm’s economic activity

on others who are not directly involved.

Review:​
An important characteristic of externalities is that the benefits and costs created by
externalities are not reflected in the market prices of goods or services.

Private goods with negative externalities:

 ●​ They do not internalize the cost, produce more.
●​ Firms that do not pay for environmental issues.

Positive externalities:

●​ When you use goods, you can benefit, and also society can benefit from it (e.g.,
vaccination for children, public libraries).

Quasi-public:

●​ Public goods with positive externalities.

Quiz:

●​ Chocolate is a private good with no externalities; there is no need for government

intervention.

Public solutions:

●​ The government can intervene to prevent market failure caused by externalities and
restore efficient resource allocation.
●​ Government interventions are often carried out through taxes and subsidies.

The Pigouvian Tax:

●​ Internalizing external costs.

●​ Pigouvian subsidies.
●​ Prohibition of an activity causing negative externalities.
●​ Direct regulations for negative externalities.
●​ Defining tradable pollution permits.

Public solution:

●​ Taxes, subsidies, setting bans and regulations.

Education:​
Government provide higher education or not explain (137).

●​ Why should the government involve itself so extensively in education, rather than
leave its provision to the market?
○​ Private goods with externality, the answer of it.
●​ Markets fail to provide a good efficiently when it is a public good or when it generates
externalities, so we consider whether education falls into either of these categories.

Is education public?​
A public good is non-rival and non-excludable. Education does not fit either of these criteria.
It is a rival in consumption.

●​ Because the number of students in a classroom increases past some point, each
student receives less individualized attention from the teacher; the class becomes
more congested.
●​ Unlike a non-rival good, adding another consumer of education imposes a cost on
other customers.
●​ Education is excludable because one can easily prevent a student from obtaining the
services provided by a school.
●​ In short, education is primarily a private good, improving students' welfare by
changing their ability to earn a living and more generally to deal with life.

Does education generate positive externalities?​

Even though education is primarily a private good, many argue that educating a child
provides benefits to other people in society.

One possible positive externality derives from the fact that education services act as a
powerful force for socialization.

●​ In democratic governments, education gives voters a perspective on which to base

their political choices.

The case of higher education: The magnitude of external benefits of education likely varies
by education level.

●​ For example, if socialization benefits of education exhibit diminishing marginal

returns than elementary and secondary school generates higher external benefits
than higher education, suggesting that the government should intervene less in
higher school than the earlier levels.
●​ Indeed, the government subsidizes higher education less than primary and
secondary education.
Some argued that college education should be subsidized because it increases productivity.
That college increases productivity may be true, but as long as the earnings of college
graduates reflect their higher productivity, there is no externality.

For now, the key point is that for an external argument to be convincing, one must show that
their productivity gain due to higher education is not reflected in student future earnings.

Education Case

Case 1:​
A person who receives a university education becomes a more competent engineer (daha
yetkili bir mühendis) and secures (?) a high-paying job. Do you think that the government
should intervene with the engineer?

●​ If the benefits of a high-paid job are reflected in individuals' earnings, it means the
government shouldn’t subsidize. It has already been reflected in individual earnings.
●​ There is a market for this engineer because he is a competent engineer, and after the
education, a high-paid job.
●​ Government do not intervene.
●​ There is no existence of externality. He gets earnings from what he works, that's why
the government doesn't need to intervene.

Case 2:​
If an engineer makes a discovery that benefits society and also receives compensation for it,
can we say that an external existence exists? Why or why not?

●​ He gets compensation for it, so there is no externality. Even though the engineer has
made a discovery that benefits society, if the engineer is individually compensated for
it (for exp. high salary, patent revenue, award), the benefit has been internalized at
an individual level.
●​ So, an externality arises only when the benefit or costs of an action... There is a
reflection in his salary. He is compensated for it. That’s why there is no externality.
Because there is internalization.
●​ There is a market mechanism function because there is a market; this guy worked
and, after that, he made a discovery. After that, he gets the compensation, he gets
the award, so there is no market failure.

For exp., Biontech. Aşıyı buldu, para ödülü aldı. Dışsallık yok artık içselleştirildi çünkü parayı
vererek dışsallığı kaldırdın.
Case 3:​
If an engineer believes they will be adequately compensated for their innovation but lack the
necessary environment and motivation to develop it, should the government intervene in this
situation?

●​ Without motivation and a necessary environment, the engineer does not want to work
and research. “Brain Drain”. Government should intervene in the environment;
otherwise, there can be a brain drain in society. If there is no environment and
motivation, market failure happens, making the society brain drain. And this is a
social damage for society.
●​ Because you covered this higher education to the engineer, but then you lost it to
another nation because of the brain drain. Government should intervene because of
the brain drain. Otherwise, they cannot take this positive externality to society.
●​ If the government does not intervene, the market will fail because there is no
productivity. It cannot happen in the market. That’s why the government should
intervene and get the benefit for society.

For example:

●​ In the USA, when an idea is funded, there is a reward for innovation. But this is not
the case for Turkey in extreme cases.
●​ We want this innovation in Çorum. The government should intervene by
implementing a tax cut (?). If the government does this intervention, then the
government should compensate and create an environment for the innovators.
●​ Government should intervene in this area to get this innovation.

If there is a solution for cancer, everybody wants to pay for it. But why is this not happening
in TR? Because there is no environment and motivation for it.

●​ Who says it is a good job or not? Market says that.

●​ Governments have limited resources, so should they intervene in which one?
Government should take into account the positive externalities ratios of these
departments like medicine, physics.
●​ Someone has a job; someone has no job but has the same taxation. That’s a big
problem.
Health Insurance Market

What makes the market unique?​

Asymmetric information occurs when one party in a transaction possesses information
that the other party does not have access to.

If insurance provided in a competitive market can earn normal profits, why is government
intervention necessary?​
The issue is particularly.

First ideal scenario:​

If an insurance company knew the health risk of its customers, it could set an appropriate
premium for each individual.

●​ 10 people selected: High risk 6k cost, low risk 3k cost.

●​ 5×6+5×3=455×6+5×3=45k, but the total paid premium is 30k.
●​ 15k loss. If the premium is set to 4500, neither profit nor loss occurs, but the low-risk
group would not pay more than 3500.

Public Revenues

Based on sovereign authority:

●​ Taxes, fees, duties, betterment levies, parasifcal revenues, monetary and tax
penalties, funds, seigniorage revenues, mandatory borrowings.

Not based on sovereign authority:

●​ Property, enterprise and privatization revenues, non-mandatory borrowing, donations

and aid, other revenues.

Taxes:

●​ Taxes are payments collected by the state or public institutions. Authorized for
taxation based on solar power and legal coercion to finance public services. These
payments are imposed on natural or legal persons, individuals or firms, and are
non-compensatory.

Characteristic of taxes:

●​ Mandatory payments, collected without a direct return to the payer, based on legal
and sovereign authority; used to finance public goods and services.
Taxes collected by Central government:

1.​ Income taxes (income taxes)

2.​ Corporate taxes (income tax)
3.​ Motor vehicle tax (wealth)
4.​ Inheritance and transfer tax (wealth)
5.​ Special consumption tax (expenditure)
6.​ VAT (expenditure)

Taxes collected by local government:

1.​ Proper tax

2.​ Environmental cleaning tax
3.​ Entertainment tax
4.​ Advertising and billboard tax

Based on subject:

●​ Income and wealth taxes are achieved to be able to pay, but expenditure tax is not.

Based on economic activities:

1.​ Whether the tax can be shifted

2.​ Efficiency
3.​ Objective or subjectivity
4.​ Continuity of the tax subject
5.​ Whether the taxpayer is predetermined

●​ If you buy water and pay VAT, someone else pays it indirectly.

Direct taxes you can feel: Ability to pay → Increases equity of income distribution.

Indirect taxes you cannot feel: Income inequality → Not achieved ability to pay.
Income, Wealth, and Expenditure Taxes

Income Tax:​
The subject is the income of natural persons.​
Income is defined as the total of gains and revenues earned by a natural person within a
calendar year.

Income is classified into seven components:

1.​ Commercial profit

2.​ Agricultural profits
3.​ Wages
4.​ Independent professional income
5.​ Income from immovable property
6.​ Income from movable property
7.​ Other gains and revenues

Taxpayers:​
Natural persons are liable for income tax.

Taxable events:​
The event that gives rise to tax liability is earning income.

Tax bases:​
For each of the seven components of income that requires declaration, the net amount is
determined according to legal provisions within a calendar year. After applying relevant
deductions, exemptions, and exclusions, the taxable base is determined.

Tax Role Structures:​

A progressive tax rate is applied. Income is divided into five brackets, with the following rates
applied to each: 15%, 20%, 27%, 35%, and 40%.

Key Features of Income Tax:

1.​ Direct tax: Collected directly from the taxpayer.

2.​ Subjective: Takes into account individual circumstances.
3.​ Progressive: Higher income leads to higher tax rates.
4.​ Fair: Aims to achieve equity by reflecting the ability to pay.
5.​ Flexible: Provides high automatic stabilization during economic fluctuations.
6.​ Difficult to shift: Unlike indirect taxes, it is a burden and not easily passed to others.
7.​ Centrally collected: Collected by the central government.
8.​ Best reflects payment capacity: Captures the taxpayer's ability to pay most
accurately.
Corporate Tax:​
The income generated by corporations ultimately gets distributed among individuals,
transforming into personal income.

Independent Legal Entity:​

Corporations are legal entities, separate from their shareholders, with special rights that
individuals cannot have on their own. For example, corporations can issue bonds and
stocks.

Advantage of Corporate Structure:​

Operating as a corporation provides certain advantages, such as faster growth through
self-financing when profits are reinvested instead of being distributed.

Greater Market Power:​

Compared to individuals, corporations have greater competitive and bargaining power in the
market.

Subject of the Tax:​

Taxable income of the following entities:

1.​ Capital companies

2.​ Cooperatives
3.​ Public economic enterprises
4.​ Economic enterprise owned by an association of foundations
5.​ Joint ventures

Corporate income consists of some seven components.

Taxpayer:​
The entities listed above are liable for corporate tax.

Taxable Event:​
The event that creates the tax obligations is the earning of corporate income.

Key Features:

●​ Objective indirect: It is a direct tax that does not consider the personal
circumstances of shareholders.
●​ Less flexible: Compared to income tax, it lacks flexibility due to its flat rate.
●​ Less fair: Fairness is debated as it may or may not be shifted to consumers.
●​ Ad valorem: Calculates this percentage of the corporation's net income.
Taxes on Wealth in Turkey:

●​ Wealth taxes are direct taxes levied on the wealthy, which is another indicator of the
ability to pay.

Reducing Income Equality:

●​ These taxes are primarily aimed at reducing inequalities in income distribution rather
than generating revenue.
●​ The inheritance system enables certain individuals to perpetually maintain high
income levels.

Protection of Wealth:

●​ The state protects wealth directly and indirectly through public service and
contributes to its appreciation over time.
●​ For this reason, wealth taxes should be paid in return for these benefits.

Taxing Untaxed Wealth:

●​ Wealth taxes ensure the taxation of untaxed income that was not declared but later
contented into wealth.

Regulatory Functions:

●​ Wealth taxes can also serve a regulatory function by taxing previously undeclared
and untaxed incomes when they are transformed into assets.

Wealth Taxes in Turkey:

●​ The wealth taxes currently applied in Turkey.

Property Tax:

1.​ Subject of the tax: Buildings, land, and plots located within Turkey.
2.​ Taxpayer: The owner of the building, land, or plot if there is a usufruct right, or the
person who uses the property as if they were the owner in the absence of above. In
shares of ownership, taxpayers are responsible according to their shares. In joint
ownership, taxpayers are jointly liable.
3.​ Key features: Direct objective flat rate collected by local administrations and
classified as a specific wealth tax.
4.​ Motor vehicle tax: Motorized land, air vehicles registered with relevant authorities.
5.​ Taxpayer: The individuals or legal entities in whose name the vehicle is registered.
6.​ Taxable event: Registration or licensing of the motor vehicle.
7.​ Key features: Direct objective specific tax collected by the central government and
classified as a specific wealth tax.
8.​ Inheritance and transfer tax: Consist of two tasks:
○​ Inheritance tax: Levied when wealth is transferred upon death.
○​ Transfer tax: Imposed to prevent tax evasion by transferring wealth before
death.
○​ Subject of the tax: Transfer of assets located in Turkey or owned by Turkish
nationals, whether through inheritance or without compensation.
9.​ Expenditure: Indirect taxes levied on every single consumption point.

In Turkey, primary taxes on expenditures are VAT, special consumption tax, and customs
duties.

VAT:

●​ It is a proportional tax levied on the value added to each stage of production

conception.
●​ It applies to goods and services delivered during commercial, agricultural, or
professional activities or on imports.

Key features:

●​ It takes domestic, sold, and imported goods and services.

●​ It exempts exported goods, financial services, and public services.

Characteristics:

●​ General consumption tax, indirect objective, broad-based, efficient collection by the

central government.

Special Consumption Tax (SCT):

●​ SCT applies to specific goods and services in addition to general consumption taxes,
such as VAT.
 ●​ Known internationally as excise tax, they target luxury items or goods deemed
harmful to health or the environment, such as alcohol, tobacco, and petroleum
products.
●​ SCT can be levied as a specific amount or as a percentage.

Key features:

●​ Narrow-based but highly efficient.

●​ Collected by the central government.

SCT Taxable Goods:

1.​ Fuels, natural gas, oil.

2.​ Motor vehicles.
3.​ Alcohol, tobacco.
4.​ Luxury goods, cosmetics, electronics, etc.