4 - 1 Unit 4 Market Failure and the Role of the Government Honors Economics.

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Unit 4

Unit 4

Market Failureand the Role

of theGovernment

Honors Economics

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ADAM SMITH

Wealth is Material Goods, not Gold

-The Wealth of Nations1776

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FREEDOM OF CHOICE

MARKETS

NOGOVERNMENT

INTERFERENCE

COMPETITION

Smith’s Free Market

PRIVATEPROPERTY

SELF-INTEREST

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Other Characteristics

•Specialization and Trade•Capital Investment•Use of Money

Smith’s Free Market

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The Case for the Market System

EfficiencyGrowth

Freedom

THE INVISIBLE HAND

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Karl Marx

Market Failures

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The world praises the individual who makes the most people happy.

-Das Kapital1867

Karl Marx

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The Situation in 1868• Workers - including women and children as

young as 4 - spent 14 hours a day, 6 days a week on the job

• factory work was unsanitary and unsafe with no guarantee of compensation for injury or illness

• 80% of factory workers lived in poverty huddled in ghettos and tenements

• business cycles made workers the victims of either high inflation or high unemployment

• the richest 1% owned over 90% of total wealth

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Wealth is Utility, not Material Goods.

-Das Kapital1867

Karl Marx

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• All wealth is a direct result of combining Labor with the other Tools of Production

LABOR THEORY OF VALUELABOR THEORY OF VALUE

• The concept of Private Property has separated the worker from access to the other Means of Production

ALIENATIONALIENATION

Scientific Socialism

EXPLOITATIONEXPLOITATION• Private Ownership allows the Capitalist to seize the

Surplus Labor Value of the worker as Profit by paying Subsistence Wages

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•Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $331,000,000.00

•The daily cost for running Walt Disney World is about $259,000 a day; that’s $94,534,000 a year.

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•Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $331,000,000.00

•The daily cost for running Walt Disney World is about $259,000 a day; that’s $94,534,000 a year.

In the final year before he was fired as CEO of the Disney Corporation,

Michael Eisner was given a bonus of

$202,000,000.

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QUESTION:

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If Michael Eisner didn’t show up for work this Saturday, could you still go to Disney

World?

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If all the employees didn’t show up for work this

Saturday, could you still go to Disney World ?

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BUSINESSCYCLES

IMPERFECTCOMPETITION

PUBLICGOODS

ASYMMETRICINFORMATION

Marx’s Market Failures

INEQUITY

EXTERNALITIES

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BUSINESSCYCLES •SEASONAL CYCLES

•36 MONTH CYCLES•10 YEAR CYCLES

•50 YEAR CYCLES•STRUCTURAL CHANGES IN TECHNOLOGY

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Marx’s Theory of the Business Cycle

Level of

Real O

utp

ut

Time

Peak

Peak

Peak

Recession

Recession

Expansion

Expansion

Trough

Trough

Growth

Trend

Twin Problems of the Business Cycle• Unemployment• Inflation

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0

2

4

6

8

10

12

1965 1970 1975 1980 1985 1990 1995 2000 2005

Three Facts About Economic Fluctuations

As output falls, unemployment rises.As output falls, unemployment rises.

Unemployment rate, percent of labor forceUnemployment rate, percent of labor force

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An Interesting Aside About Economic Fluctuations

Some Economists believe Technological Cycles have become shorter.

Some Economists believe Technological Cycles have become shorter.

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ASYMETRICINFORMATION

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EXTERNALITIES

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Fig. 26.1 top

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INEQUITY

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• 2007 US Family Income Shares before Taxes and Transfers: – Lowest 5th = 1%– Second 5th = 7%– Middle 5th = 14%– Second highest 5th = 23%– Highest 5th = 55%

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• 2007 US Family Income Shares after Taxes and Transfers: – Lowest 5th = 5%– Second 5th = 10%– Middle 5th = 16%– Second highest 5th = 23%– Highest 5th = 46%

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BUSINESSCYCLES


PUBLICGOODS

ASYMMETRICINFORMATION


INEQUITY

EXTERNALITIES

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Alternatives Considered #1

REVOLUTION

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Unions

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government

intervention

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SOCIALISM• GOVERNMENT BY DIRECT POPULAR VOTE

• PUBLIC OWNERSHIP OF THE MEANS OF PRODUCTION– COMMUNICATION

– TRANSPORTATION

– FINANCE

– EDUCATION

– HEALTH CARE

• PROGRESSIVE INCOME TAX

• REDISTRIBUTION OF INCOME

• CREATION OF A SOCIAL WELFARE SAFETY NET

• ELIMINATION OF DISCRIMINATION

4 - 1 Unit 4 Market Failure and the Role of the Government Honors Economics.

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