1. The U. S. Economy: Private and Public Sectors
Chapter 4

2. US Economy Economists divide the economy into three groups: households
businesses
government

3. Households

4. Households Households are:
One or more people living together in a housing unit, supplying the economy with labor and purchasing products
There are about 114 million households

5. Several different ways to measure and compare household incomes

6. Households The Functional Distribution of Income is;
- How the nation’s earned income is distributed between the different functions (categories) of wages, profits, rents and interest.

7. Households The Personal Distribution of Income is;
- How the nation’s earned income is distributed between different households.

8. Households Households on average:
Pay 13% of their income in personal taxes
Save 1% of their income
Spend 86% of their income

9. Households Households save:
For security – to have income in retirement, in case of emergencies, to pay for college
For speculation – to have more money in the future

10. Households
Household income, savings and consumption are directly related:
The higher the income, the more people spend
The higher the income, the more people save

11. Businesses

12. Businesses Businesses are:
An organization, usually in existence to produce a profit for owners, which combines labor, capital and other resources to produce products.

13. Businesses Plant Firm Industry A physical establishment
A business organization that owns and operates plants
Industry
A group of firms that produce the same or similar products

14. Businesses: Types of Ownership
Sole proprietorship
A single owner
Partnership
Two or more owners
Corporation
A legal entity that can perform the functions of any business entity. Owned by stockholders

15. Businesses: Advantages of Corporations
Limited liability for stockholders
They don’t risk anything except the value of their stocks
Ability to raise funds
Large companies find it easier to raise money
Political and economic power
Large corporations can alter the marketplace, or influence government, to meet their desires

16. The Role of the Government

17. Government
Notice that the emphasis is on the minimal role government plays.
For some people even this little is too much.
For others, the government can and should do more.

18. Government Functions Provide the legal structure Maintain competition
Redistribute income
Correct market failures
Promote stability

19. Government: Legal Structure
The government should provide the legal structure for the effective functioning of the capitalist (market) system.
This includes courts and police to fight crime and enforce contracts.

20. Government: Legal Structure
The legal structure also includes a state strong enough to pass laws and enforce contracts.
Russia is the example of a state that is too weak: the mafia took over the country.

21. Government: Maintain Competition
The most efficient economic system is competition. But there appears to be a natural tendency for competition to end and monopolies to emerge.
Government should provide the legal structure to fight monopolies.

22. Government: Redistribute Income
All democratic governments redistribute income, as a result of popular beliefs about fairness, justice, and lobbying for special groups.

23. Government: Correcting Market Failures
Market failures take place when firms produce the wrong amount of certain products
Or when markets fail to allocate resources to produce necessary products.

24. Government: Correcting Market Failures
The first leads to spillovers
The second involves public goods

25. Spillovers

26. Correcting Market Failures: Spillovers
Spillovers take place when costs or benefits of an economic activity are passed on to parties who are neither buyers nor sellers in that activity.

27. Correcting Market Failures: Negative Spillovers
A negative spillover occurs when economic activities inflict costs on third parties.
Examples of negative spillovers include all types of pollution.

28. Correcting Market Failures: Negative Spillovers
In the case of spillovers, the government needs to find some mechanism to either pass the costs onto offending firms, or get them to change their behavior.

29. Correcting Market Failures: Negative Spillovers
Governments can raise taxes on the polluting firms.
Or it can pass laws to force the companies to change their behavior

30. Correcting Market Failures: Positive Spillovers
A positive spillover occurs when economic activities benefit someone in addition to the buyer and seller of a product.
Examples of positive spillovers include all types of education, libraries, immunization shots.

31. Correcting Market Failures: Positive Spillovers
In the case of positive spillover, the market system doesn’t produce enough of the product.

32. Correcting Market Failures: Positive Spillovers
In the case of positive spillovers, the government needs to increase demand, or increase supply, or produce the product itself.

33. Correcting Market Failures: Negative Spillovers
Governments can raise taxes on the polluting firms.
Or it can pass laws to force the companies to change their behavior

34. Public Goods

35. Correcting Market Failures: Public Goods
Public goods are products that are economically and socially justifiable, but which no private firm will produce.

36. Correcting Market Failures: Private Goods
Are produced by firms and have two characteristics
Private goods have excludability and rivalry

37. Correcting Market Failures: Private Goods
Excludability
Buyers who are willing and able to pay the market price enjoy the benefits of buying the product.
People who can’t afford the good, don’t enjoy the benefits

38. Correcting Market Failures: Private Goods
Rivalry
Means when one person buys the good, no one else can buy or use them.
If I buy a pair of jeans, no one else can buy or use them.

39. Correcting Market Failures: Public Goods
Are usually produced by governments and have two characteristics
Public goods have non-excludability and non-rivalry

40. Correcting Market Failures: Public Goods
Nonexcludability
People who buy the good or service benefit, but so do people who don’t buy the product.
Street lighting, flu shots

41. Correcting Market Failures: Public Goods
Nonrivalry
If I buy the product, other people can still use it.
If I “buy” a national defense, everyone else can enjoy the benefits as well.

42. Correcting Market Failures: Public vs. Private Goods
The line between public and private goods is not sharp.
It varies from one society to another, and from one time period to another.

43. Government: Promoting Stability
Governments should also control inflation and reduce unemployment.
Too much of either is bad for the economy, and ultimately, businesses.

44. Federal Finance

45. Government: Federal Budget
Notice the charts on page 85.
Notice how much goes to defense.
Notice how the tax structure lightly taxes corporations and the wealthy, compared to other countries.

46. Government: State Budgets
The primary tax revenue for states is sales and excise taxes.