1. Chapter 5 The U.S. Economy: Private & Public Sectors
Mixed Economy = Free Market + Socialism

2. Functional Distribution of US Income 2002
Wages and Salaries 72 %
Rents 2%
Interest 8%
Corporate Profits 9%
Proprietors Income 9%
owner of a business

3. Disposition of Household Income: How it’s spent

5. 2008 International Monetary Fund

6. The five economic functions of the government # 1
Provide a Legal Framework for Capitalism:
Enforce Laws and Contracts.
Print Money
Establish official weights & measures
Establish standards for consumer goods (ex. Meat Inspection Act)

7. The five economic functions of the government # 2
Protect markets from monopolistic behavior and promote competition (ex Sherman Anti Trust Act)

8. The five economic functions of the government # 3
Redistribute Income.
Provide an Economic Safety Net: subsidize (welfare, social security)
Tax the rich to give to the poor
Regulate labor (minimum wage, unions)

10. The five economic functions of the government # 4
Pay for the Infrastructure* that allows economic growth
* the fundamental facilities and systems serving a country, such as transportation and communication systems, power plants, and schools.

11. US Budget for 2009

12. The five economic functions of the government # 5
Correct Market Failures: (Recession, Inflation)
Stabilize the Economy: Provide market information, Correct negative externalities, Subsidize goods with positive externalities
Fight unemployment
Encourage price stability
Promote economic growth 

13. Spending Side Effects: Spillovers (Market Failures)
Benefits: gov'ts, firms and individuals can pay for goods & services that do not just benefit them but spillover & benefit us all
Costs: gov'ts, firms and individuals can pay for goods & services that create a negative cost to others

14. Spillovers
are EXTERNALITIES of economic activity* or processes upon those who are not directly involved in it.
For good (Benefit) or bad (cost)
*producing, selling, buying goods/services

15. Spillovers are Market Failures
Negative: pollution, Odors from a rendering plant
Positive: the beauty of a homeowner's flower garden is a positive spillover effect upon neighbors.

16. two major cases of market failure #1 Spillovers (Positive or Negative Externalities)
Pollution (obviously) negative because cost to society is not 100% paid by company.
Vaccinations, you can be the one unvaccinated kid; Pharmaceutical company loses the profit from your vaccine.

17. two major cases of market failure # 2
2. Fails to allocate any resources whatsoever to the production of certain goods/services whose output is economically justified. (regards Public Goods)

18. Two basic corrective actions the government can take to correct for negative externalities
1. legislate
there is one drug bust in the U.S. every 18 seconds

19. Two basic corrective actions the government can take to correct for negative externalities
Tax the offending product (Excise Tax)

20. positive spillover benefits or positive externalities
Actually create a loss in the economy and are also considered a ‘market failure’.
The loss to the economy in the graph is represented by the rectangle created by (Ps – Pp) x (Qs- Qp)

21. A positive externality can be corrected.
The guy in the middle wants to sell his house. The value is enhanced by his neighbors (Rod & Mariah) property values.
He doesn’t bother spending $$ to fix it up.

22. three ways a positive externality can be corrected
Subsidize the seller
Subsidize the buyer
You provide the good

23. Correcting Externalities
Subsidize Consumers
ex: cities provide funds to improve neighborhoods, lighthouses, education, and national defense.

24. Correcting Externalities
Subsidize Suppliers
Ex: gov't provides funds for hospitals & universities

25. PRIVATE GOOD A private good is rival and excludable.
An example of a private good is my car. There are a fixed number of cars; there are not enough built for everyone to own one. My car is also excludable; I do not have to allow anyone else to drive or ride in my car.

26. PUBLIC GOOD:
Paid for by the government, is non- excludable and is non rival.
The non rival part of this definition means that my consumption does not affect your consumption of a good; I do not "use it up". (Examples: Air, national defense, sunlight, fireworks)

27. Non-excludability
Non-rivalness and non-excludability may cause problems for the production of such goods. Why bother producing it if I can’t make $$

28. Free Riders
Those who consume more than their fair share of a public resource, or shoulder less than a fair share of the costs of its production.

29. Free Riders are Consumers & Producers
Ex: factories that pollute, do not pass the ‘cost of pollution’ to consumer.
Price of that good in the market place is too low.
Negative Externality: Pollution in China
It’s why goods are cheaper to make there.

30. Why Free Riders are a Market Failure
Underestimates the ‘real’ demand for a good/service as so industry under- produces and revenues & jobs are lost

31. Free Riders
Free riding is considered to be an economic "problem" only when or when it leads to the excessive use of a common property resource.

32. Firms Are Profit Orientated
In the Free Market & Capitalistic systems private firms do not produce those goods/services because they can’t stop free riders, so why would anyone pay?

33. Tragedy of the Commons
is a dilemma in which multiple individuals, acting independently, and solely and rationally consulting their own self- interest, will ultimately deplete a shared limited resource even when it is clear that it is not in anyone's long-term interest for this to happen.

34. Spillovers Create Inefficiency
As Gt Br pays for wind farms,
demand for coal decreases,
price decreases, and China
uses more coal and there is
less incentive for China to use
wind energy.
Doesn’t matter Beneficial or negative, both cause goods to be over or under produced.

35. How the government allocates resources to public goods
Public Policy: bills to spend money or to tax

36. circular flow chart

37. Difference between government purchases and transfer payments
Government Purchases: Government buys goods and services.
Transfer Payments: government gives money to individuals to increase their income (Social Security)
Government Purchases & Transfer Payments
as a percent of GDP

38. Government Spending
government purchases and transfer payments and interest
Biggest item: _____

39. Some of the causes of the growth of public spending
War and Defense:
B) Population Growth:
C) Urbanization and the Demand for Public Goods:
D) Environmental Quality:
E) Egalitarianism: (to try & make the world a better place)

40. 4 major sources of Federal revenue
1. Personal Income Tax:
2. Payroll Tax:
3. Corporate Tax:
4. Excise Tax: a tax levied on certain goods (gas, cigarettes). Typically tax is added to price.

41. graduated or progressive tax system
higher tax rates for people with higher incomes. Direct Relationship.
“Ability to pay”: the more you earn, the higher your tax rate will be.
taxable income between tax bracket
0 and 8, %
8,025 and 32, %
32,550 and 78, %
78,850 and 164, %
164,550 and 357, %
357,700 and above %

42. Taxable Income = Income – (Deductions + Exemptions)
Deductions: property taxes, interest on mortgage, charity contribution, kids

43. Deductions aka Tax ‘Loopholes’
The US IRS tax system allows for legal deductions that lower taxable income
US Tax System not as Progressive as it looks!
$19,900,000 summer house
Property taxes $40,424
Interest on Mortgage: 950,000

44. progressive tax system Rationale
Has to do with creating income equity not because wealthier people drain government recourses more, (because clearly they don’t!)
Cops arrest meth lab

45. Tax Rates Average Tax Rate: ATR = Average Taxes Paid Total Income
Example: Income $60,000
ATR = 10, = %
60,000
taxable income between tax bracket
0 and 8, %
8,025 and 32, %
32,550 and 78, %
78,850 and 164, %
164,550 and 357, %
357,700 and above %

46. Marginal Tax Rates
Marginal Tax Rate: the rate of tax applied to the last dollar added to your taxable income
Income is $60,000
MTR = 25%
taxable income between tax bracket
0 and 8, %
8,025 and 32, %
32,550 and 78, %
78,850 and 164, %
164,550 and 357, %
357,700 and above %

47. Regressive Tax
A tax that takes a larger percentage from low-income people than from high- income people.
Social security (because there is a cap)
Sin Taxes & Lotteries

48. Proportional Tax Same % for all income levels Ex. Sales Tax
Ends up being Regressive because lower income people spend a larger percent of their income than rich people on sales tax.

49. Social Security Tax (FICA) is Regressive
For wage levels above the limit, the absolute dollar amount of tax owed remains constant: You make $100,000 you pay same AMOUNT as Lady Gaga.
Federal Insurance Contributions Act

50. Adam Smith, Wealth of Nations
“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess.” 1776

51. Proportional Tax or Flat Rate
Fixed Tax Rate: everyone pays the same %.
Sales Tax is an example of this. Which is regressive because poorer people are left with less

52. Disproportionate Tax
Tax that is NOT proportionate to income or consumption.
Could tax rich more than poor (luxury tax) or poor more than rich (sin tax).

53. Lump Sum Tax:
a fixed amount no matter what the circumstance of the taxed entity or income level of the taxpayer.
Poll Tax
Tolls on highway
Considered Regressive, unequal

55. Federal Government Revenues
#1 Individual Income taxes
#2 Payroll Taxes
#3 Corporate Income Taxes

56. four sources of revenue for the state governments
Sales taxes, excise taxes
State Income tax
Corporate Income Taxes & Licensing Fees

57. Excise Taxes
taxes paid when purchases are made on a specific good, such as gasoline.
Excise taxes are often included in the price of the product.
Examples: gas, cigarettes, alcohol

58. Benefit Received Principle
the individuals who receive the benefit of a good or service should pay the tax necessary to supply that good or service: gas taxes are finance highway construction and repairs.

59. Transfer Payment
Funds given to State Governments from the Federal Government
Book does not show this as major revenue source for states

60. four major expenditures for the state governments:
Education
Public welfare
Health & Hospitals

61. The two major sources of revenue for the local governments
1. PROPERTY TAXES
Mayor Donald Zeigler

62. The major expenditures for the local governments

63. Lotteries!
the Federal government’s reduction in transfers and grants led to an increase in state lotteries to create the missing revenue.
By Age
the massive postwar Boomer generation

64. Lottery Revenue Pays for Gov't Programs
the real winners are supposed to be education, environmental protection, and other projects earmarked to receive lottery proceeds.

65. How has the Federal government’s reduction in transfers and grants led to an increase in state lotteries?
Lotteries bring in revenues to States and increasing lotteries helps states survive the Federal government giving states less.