Types Of Legal Business Sole Proprietorship Advantages: Easy to set up, own boss, incentive as profit is income Disadvantages: limited financial resources, unlimited liability, total responsibility

Partnerships Advantages: easy to organize, greater specialization of tasks, better access to financial resources Disadvantages: parallel those of sole proprietorship, plus personality difficulties, management responsibility issues, what to do if a partner leave, unlimited liability

Corporations Advantages: improved ability to raise financial capital (money), limited liabilities, permanence conducive to planning long term Disadvantages: red tape and government regulations may be excessive, disconnect between management and owners (stockholders)

Government Expenditure Goods and services Transfer Payments In the past 50 years most growth in government expenditure has been in transfer payments and defense

Categories Major Income Security National Defense Health Interest on National Debt

Receipts Personal Income Tax (PIT) Progressive and marginal Payroll Taxes Social Security and Medicare taxes CIT Corporate Income Taxes Excise Taxes

State Revenues Property Tax Sales Tax Fees and Fines State expense: public welfare, education, highways, health, public safety Local Expense: Education, utilities

The Public Sector What does government do in the economy? A. Provides the legal structure for business to operate 1. ensures property rights 2. provides for enforcement of contracts 3. acts as a referee in the market and imposes penalties for errors

Government cont. 4. Improves allocation of resources by supplying money, ensuring quality, defining ownership rights, and enforcing contracts 5. Widens the market place and fosters greater specialization in the use of resources How much regulation and control is needed? Where the MB and MC of government regulation are equal. This is the best answer that we have to this question.

Government Cont. B Maintains competition 1. restricts monopoly to natural monopolies where feasible 2. regulates price and service in natural monopolies 3. designs regulations to encourage competition and regulate business behavior

Government cont. C. Redistribution of income 1. Transfer payments such as relief to those who are in need, handicapped, dependent, and unemployed 2. Intervenes in market by modifying prices such as price support and price ceiling programs 3. Uses taxation particularly income tax to redistribute wealth to some degree

Market Failures and Stability D Reallocation of resources Market failures occur when the competitive market system produces the “wrong” amounts of goods or fails to provide any at all. These failures of the market system are called spillover effects or externalities.

Stability An economy’s level of production will depend to a great extent on the level of spending vs. the it capacity to produce. When spending is low, government may promote spending by lowering taxes or increasing its own spending to reduce unemployment When spending is excessive, government may reduce its spending or raise taxes to curb spending or foster stability in prices

Spillovers and Externalities These occur when some of the benefits or costs of production are not fully reflected in market demand or supply scheduled. In other words, too little or too much of a product is being made. Some of the benefits or costs may “spill over” to third parties.

Examples Pollution=polluter gains, society pays Vaccinations=non-vaccinated gain, vaccinated pay Parks= non users pay, users benefit Public Transport= users benefit, non-users pays Roadways= users benefit, non-users pay Education= society benefits as a whole, some gain no benefit from this at all

How does government correct market failure? Spillover Costs require the govt. to force producers to internalize these costs by: Legislation which can limit or prohibit Taxation specifically targeted on either the costs or the product

How does govt. cont.? Spillover BENEFITS require the government somehow increase demand for the goods that are underallocated Can increase D by providing subsidies to encourage consumer to use Can finance production of the good or service Can increase supply by subsidizing production

Private and Public Goods Private goods are produced through the market because: They are divisible Come in small units that are affordable Subject to the exclusion principle (those who cannot pay are excluded from the benefits of the product)

Public or social goods Public goods are those not provided or at least not provided on any scale that would be useful because they are Indivisible Not subject to the exclusion principle

The Free Rider Issue The market place would not produce such goods because too many people could use them without payment. This is called the Free Rider Issue. So these goods must be provided through by the government and financed by compulsory taxation.

Quasi Public Goods These are goods that may be provided by the market but have such large spillover benefits that not enough are provided in the market place. Medical Care Education Housing

reallocation Government reallocates resources from private to public use by levying taxes on individuals and business reducing their purchasing power and using this revenue to purchase public and quasi-public goods. This may bring about significant change in the composition of the economy’s total output.