In terms of markets, what is the role of the government?
• Production • Regulation
Does Regulation Stifle Growth?
• http://www.pbs.org/newshour/economy/makingsense/
Considerations & Effects
• People
– Markets
– Groups within society
– Individuals
• Efficiency
– Demand Failures
– Supply Failures
– Deadweight Losses
Why the invisible hand may fail
• 4 Reasons– Lack of Competition
– Externalities
– Public Goods
– Poor Information
#1. Market Failure
Lack of Competition
Lack of Competition
• Sellers Gain– Restrict Q– Higher P
• Regulation– Public Utilities
P2
P1
P
D
S2
S1
Q1Q2 Q
#2. Externalities
Good Externalities - Benefits
Bad Externalities
- Costs
Negative Externalities
• Supply Failure• Suppliers do not
have to pay the full value – Will supply more b/c
costs paid by others
• Costs affect supply• Taxes raise price to
public equilibrium
P2
P1
P
Private Value
Social Cost
Private Cost
Q1Q2 Q
Externality Cost
Positive Externalities
• Demand Failure• Public not willing to pay
full value – Costs or restrictions must
be imposed to force price up to societies value
• Benefits affect demand• Subsidies absord costs
creating public equilibrium
P2
P1
P
PrivateValue
Private Cost
Social Value
Q1
Q2 Q
External Benefit
Pigouvian Taxes & Subsidies
• A.C. Pigou– Amount of taxes or
subsidies needed to change market equilibrium to include public costs & benefits
Externalities – Fracking
• http://www.colbertnation.com/the-colbert-report-videos/391552/july-11-2011/anti-frack-attack
#3. Public Goods
Education
Public Goods
• Excludable– Suppliers cannot
prevent use w/o payment
• Rivals in Consumption– Can be used by
more than one person National Defense
Problem – Free Riders
• People who benefit from activity or action but do not pay any costs
Transportation Infrastructure
Public Goods vs. Common Resources
• Common Resources– Nonexcludable & rivals in consumption
Fishing
Problem – Tragedy of the Commons
• Overuse
Public Amenities - Beaches
#4. Poor Information
Poor Information
• Infrequent Purchases
• Reliance in Known
– Brand Names
– Expert Analysis
Types of Goods
Rivals in Consumption
Yes
Yes
No
No
Excludable
PrivateGoods
NaturalMonopoly
Common Resources
Public Goods
Terms
• Adverse selection– Signaling
• Moral Hazard– deductables
Government Policies
Command Policies - Taxes
• Flat Tax– Affects smaller
users
P1
P
Demand
Q1 Q
CorrectiveTax
Command Policies - Taxes
• Per Unit Taxes– Affects marginal
benefit of each plant depending on emissions P1
P
D1
Q1
Q
D2
Q2
Control Policies - Permits
• Tradable Permits
– Limit supply– Trading creates
market efficiency
P1
P
D
Permit/Supply
Q1 Q
Antitrust Laws
• Sherman Trust Act of 1890• Clayton Antitrust Act of 1914• Federal Trade Commission• Environmental Protection Agency
Taxes
Types of Taxes
• Proportional– Example would be 10% income tax for
everyone.– Flat Tax– Harder for those with less.
• Progressive– Higher rates for higher incomes.
• Regressive– Sales tax.
• Difference between Marginal & Average Tax Rates
Types of Taxes
• Individual Income• Corporate Income• Social Security• Property• Sales• Duties
• Excise• Estate• Gift• User Fees• Tolls
http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_12-12.html
International Comparison of Marginal & Average Tax Rates
Country$50,000 in Salary $100,000 in Salary $1,000,000 in Salary
Taxes in $
% MR % AR Taxes in $
% MR % AR Taxes in $
% MR % AR
USA 7,256 25% 14.5% 20,113 28% 20.1% 325,649 35% 32.6%
Canada 7,853 22 15.7 19,580 26 19.6 279,799 29 28.0
Mexico 11,523 30 23.1 26,523 30 26.5 296,523 30 29.7
Britain 7,971 20 15.9 24,226 40 24.2 459,716 50 46.0
France 7,669 30 15.3 23,341 40 23.3 383,341 40 38.3
Germany 5,502 14 11.0 12,502 14 12.5 344,604 45 34.5
Italy 13,146 38 26.3 32,867 41 32.9 419,812 43 42.0
Australia 8,734 30 17.5 25,213 38 25.2 424,376 45 42.4
Japan 3,511 20 7.0 13,677 23 13.7 362,005 40 36.2
Income Inequality
Poverty
• Poverty Threshold or Poverty Level– Minimum level of income needed to
maintain a basic standard of living.– Determined by the government
• For individuals.• For families.
• Poverty Rate– % of people living below the Poverty
Threshold.
Poverty
• Distribution (Gaps)– Traditionally, large gaps between rich &
poor a sign of the third (poorer) countries.
– U.S. Gap widening since the 80’s.
• Measures of Income inequality– Lorenz Curve– Gini Index
U.S. Income Distribution, 1947 - 2007
Household Income: 1967-2003
Adjusted Gross Income: 1986 - 2006
Poverty
• Lorenz Curve– Measures ratio
between richest & poorest quintiles.
• Gini Index– Measures among of
distribution– Increasing numbers
(ranges from 0.0 to 1.0) means less equality
Poverty
• Limitations– Definition of poverty levels subjective.– Transfer payments
• Means tested• In-kind payments
– Diversity• Geographic• Age• Size of household
Taxation & Inequality
• http://www.colbertnation.com/the-colbert-report-videos/364881/november-08-2010/the-word---nothingness