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

After Tax Income Gains: 1979-2005

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

Gini Index since WWII

http://upload.wikimedia.org/wikipedia/commons/c/c5/GINIretouchedcolors.png

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