Economics, 3rd Edition

Differences in Values

Anneka and Henrik both take water from the town well. To pay for maintaining the well, the town 

imposes a property tax on its residents. Anneka lives in a large house worth 

€2  million and pays a 

property tax of 

€10,000 a year. Henrik owns a small cottage worth €20,000 and pays a property tax of 

€1,000 a year.

Is this policy fair? If not, who pays too much and who pays too little? Would it be better to replace the 

tax based on the value of the property with a tax that was just a single payment from everyone living in 

the town (a poll tax) in return for using the well – say, 

€1,000 a year? After all, Anneka lives on her own and 

actually uses much less water than Henrik and the other four members of his family who live with him and 

use more water as a result. Would that be a fairer policy?

This raises two interesting questions in economics – how do we define words like ‘fair’ and ‘unfair’, 

and who holds the power to influence and make decisions? If the power is in the hands of certain groups 

in government or powerful businesses, the policies may be adopted even if they are widely perceived as 

being ‘unfair’.

What about replacing the property tax not with a poll tax but with an income tax? Anneka has an 

income of 

€100,000 a year so that a 5 per cent income tax would present her with a tax bill of €5,000. 

Henrik, on the other hand, has an income of only 

€10,000 a year and so would pay only €500 a year in tax 

and the members of his family who do not work don’t pay any income tax. Does it matter whether Henrik’s 

low income is due to his decision not to go to university and take a low paid job? Would it matter if it were 

due to a physical disability? Does it matter whether Anneka’s high income is due to a large inheritance 

from her family? What if it were due to her willingness to work long hours at a dreary job?

These are difficult questions on which people are likely to disagree. If the town hired two experts to 

study how the town should tax its residents to pay for the well, we should not be surprised if they offered 

conflicting advice.

This simple example shows why economists sometimes disagree about public policy. As we learned 

earlier in our discussion of normative and positive analysis, policies cannot be judged on scientific grounds 

alone. Economists give conflicting advice sometimes because they have different values. Perfecting the 

science of economics will not tell us whether it is Anneka or Henrik who pays too much.