The Mixed Economy: The Mixed Economy: Private & Public SectorsPrivate & Public Sectors

Chapter 5Chapter 5

Chapter ObjectivesChapter Objectives

Acquire basic knowledge regarding the Acquire basic knowledge regarding the household & business components of the household & business components of the private sector economyprivate sector economy

Acquire basic knowledge of the public Acquire basic knowledge of the public sector in the U.S. Economy sector in the U.S. Economy

National Income DistributionNational Income Distribution

Wages & Salaries (70%)Wages & Salaries (70%) Proprietor (Self Employed) Income (9%)Proprietor (Self Employed) Income (9%) Capitalist Income (Corporations profits + Capitalist Income (Corporations profits +

rent + interest (12%)rent + interest (12%) Largest component of capitalist income is Largest component of capitalist income is

the profits of corporationsthe profits of corporations The sum total of all these is defined as The sum total of all these is defined as

“National Income” (NI) and will be used in “National Income” (NI) and will be used in calculating GDP calculating GDP

Personal Income (PI)Personal Income (PI)

3 different categories3 different categories TaxesTaxes SavingsSavings Spending (Consumption) By far the largest Spending (Consumption) By far the largest

and most encouraged for the last half and most encouraged for the last half century century

Our consumption drives the global Our consumption drives the global economy, and perhaps, right off the cliffeconomy, and perhaps, right off the cliff

Consumer SpendingConsumer Spending

Divided into three categoriesDivided into three categories Durable goods – More than 3 yearsDurable goods – More than 3 years Non-durable goods – Less than 3 yearsNon-durable goods – Less than 3 years ServicesServices

The Business PopulationThe Business Population

PlantPlant – Physical establishment where – Physical establishment where production or distribution takes placeproduction or distribution takes place

FirmFirm – Business organization that owns – Business organization that owns the plantsthe plants

IndustryIndustry – Group of related firms – Group of related firms Multi-plant FirmsMulti-plant Firms – Includes those firms – Includes those firms

that have been integrated both horizontally that have been integrated both horizontally & vertically & vertically

Types of BusinessesTypes of Businesses

Sole ProprietorshipSole Proprietorship – Individually owned, – Individually owned, easy to set up, profits undivided, quick easy to set up, profits undivided, quick decision making / Limited Resources, decision making / Limited Resources, Unlimited LiabilityUnlimited Liability

General PartnershipGeneral Partnership – Two or more – Two or more operate under partner agreement, more operate under partner agreement, more specialized, more resources / Decisions specialized, more resources / Decisions and profits are both divided, still unlimited and profits are both divided, still unlimited liabilityliability

Types of Businesses Cont’dTypes of Businesses Cont’d

CorporationsCorporations – Legal entity distinct from – Legal entity distinct from the individual owners, Board of Directors & the individual owners, Board of Directors & Shareholders, Usually have access to Shareholders, Usually have access to greater amounts of capital, limited liability / greater amounts of capital, limited liability / Bureaucratic in nature, Conflicting Bureaucratic in nature, Conflicting Interests (Principle Agent Problem)Interests (Principle Agent Problem)

Hybrid StructuresHybrid Structures – Limited Liability – Limited Liability Company (LLC) , S-CorpsCompany (LLC) , S-Corps

Public Sector – Government RolePublic Sector – Government Role

Enforces laws, property rights, contracts, Enforces laws, property rights, contracts, acts as a referee in matters of dispute and acts as a referee in matters of dispute and regulates behavior and imposes penalties regulates behavior and imposes penalties for wrong doing for wrong doing

Helps to allocate resources, provide Helps to allocate resources, provide markets, ensures product quality & safetymarkets, ensures product quality & safety

Appropriate regulation is at the level where Appropriate regulation is at the level where cost = benefitcost = benefit

Government & CompetitionGovernment & Competition

Competition forces producers to respect Competition forces producers to respect consumer sovereigntyconsumer sovereignty

Monopoly power allows for producers to Monopoly power allows for producers to supplant the consumer and impose its own supplant the consumer and impose its own power power

Natural monopolies occur when Natural monopolies occur when technological or economic realities make a technological or economic realities make a monopoly more efficient – Gov’t will then monopoly more efficient – Gov’t will then regulate price & serviceregulate price & service

Actions in Regards to MonopoliesActions in Regards to Monopolies

Sherman Anti-Trust 1890Sherman Anti-Trust 1890 Clayton Act of 1913Clayton Act of 1913 More recently . . . . More recently . . . . Justice Department in the 1990s targeted Justice Department in the 1990s targeted

MicrosoftMicrosoft NBA, NFL, & MLBNBA, NFL, & MLB Clear Channel in the world of radioClear Channel in the world of radio

Redistribution of IncomeRedistribution of Income

Taxes (Wealthier pay higher percentage)Taxes (Wealthier pay higher percentage) Transfer payments (Medicare, SS, Transfer payments (Medicare, SS,

Welfare, Unemployment Insurance)Welfare, Unemployment Insurance) Price support program such as subsidies Price support program such as subsidies

for Farmersfor Farmers

Spillover and Negative ExternalitiesSpillover and Negative Externalities

Results that occur from industrialization, Results that occur from industrialization, both positive & negative, may require both positive & negative, may require government involvement to ensure public government involvement to ensure public safety or stop corrupt business practicessafety or stop corrupt business practices

E-Waste, Pollution, etc. E-Waste, Pollution, etc. http://www.cbsnews.com/video/watch/?id=http://www.cbsnews.com/video/watch/?id=

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Resource AllocationResource Allocation

Market failures occur when resources are Market failures occur when resources are allocated improperlyallocated improperly

The Government must assure that The Government must assure that spillover cost is absorbed by those spillover cost is absorbed by those causing it. causing it.

Ex – BP Oil SpillEx – BP Oil Spill

Provider of Public GoodsProvider of Public Goods

Certain goods that cannot be divided (their Certain goods that cannot be divided (their use cannot be individualized) and use cannot be individualized) and therefore become public goods. therefore become public goods.

National Defense, Public SafetyNational Defense, Public Safety Not enough people would demand these Not enough people would demand these

services so the Government provides and services so the Government provides and then pays through tax revenuesthen pays through tax revenues

Exclusion Principle Exclusion Principle

The idea that a buyer will be excluded The idea that a buyer will be excluded from the benefits of product that he does from the benefits of product that he does not purchase. not purchase.

Applies to private goods, not however to Applies to private goods, not however to public or quasi-public goodspublic or quasi-public goods

Those who benefit from goods and Those who benefit from goods and services they do not pay for are labeled services they do not pay for are labeled “free riders.” “free riders.”

Promoting StabilityPromoting Stability

Responsibility of the Federal ReserveResponsibility of the Federal Reserve Policy is to tax and save if inflation Policy is to tax and save if inflation

threatens, lower taxes and spend when threatens, lower taxes and spend when economy is strugglingeconomy is struggling

Government FinanceGovernment Finance

Government purchases directly use Government purchases directly use resources to produce goods and services resources to produce goods and services

that are measured when calculating GDPthat are measured when calculating GDP

Transfer payments are excludedTransfer payments are excluded

Since 1960, transfer payments have Since 1960, transfer payments have drastically increaseddrastically increased

Federal FinanceFederal Finance

Where does it get spent?Where does it get spent? National DefenseNational Defense Public HealthPublic Health Interest on National DebtInterest on National Debt Income SecurityIncome Security

Federal FinanceFederal Finance

Where do we get the money?Where do we get the money?

Personal Income TaxPersonal Income Tax

This is a progressive tax as it accelerates This is a progressive tax as it accelerates with higher incomeswith higher incomes

Others Sources of RevenueOthers Sources of Revenue

Payroll Tax – SS contributions, etc.Payroll Tax – SS contributions, etc. Corporate TaxCorporate Tax Excise Tax – Tax on a specific goodExcise Tax – Tax on a specific good State & Local Governments obtain State & Local Governments obtain

revenue through sales tax & property taxrevenue through sales tax & property tax Money is used for education and public Money is used for education and public

welfarewelfare