1. Market Failures and the Role of the Government
Unit 6:
Market Failures and the Role of the Government
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2. Review Activity: Name that Concept
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3. Sit down when you are done
Public Good
Tax
Positive Externality
Free Rider
Marginal Social Cost
Round 1
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4. Sit down when you are done
Negative Externality
Nonexclusion
Market Failure
Invisible Hand
Common Pool Problem
Round 2
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5. Review Define Market Failure.
Identify the four market failures we have learned in this unit.
Explain why are public goods a market failure.
Explain why are externalities a market failure.
Explain why are monopolies a market failure.
By yourself, draw a positive externality.
By yourself, draw a negative externality.
Use graph to explain the remedy for positive externalities.
Use graph to explain the remedy for negative externalities.
Name 10 different super heroes.

6. Market Failure #4 Unfair Distribution of Wealth and Income
Net Worth over $2.3 billion
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7. Distribution of Wealth in the US
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8. (Based on 2003 Information)
Income Inequality
In 2003, the average American family made $66,863. Everyone is obviously rich.
What’s wrong with using the average?
Averages reveal absolutely nothing about how income is distributed.
How does the government measure distribution of income?
(Based on 2003 Information)
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9. Gap Between Rich and Super Rich
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10. THE LORENZ CURVE
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11. Measuring Income Distribution
Review the process:
The government divides all income earning families into five equal groups (quintiles) from poorest to richest.
Each groups represents 20% of the population.
If there was perfect equality then 20% of the families should earn 20% of the income, 40% should earn 40% (and so on).
The government compares how far the actual distribution is from perfect distribution then attempts to redistribute money fairly.
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12. Measuring Income Distribution
Summary:
Group #1 (Poorest 20%)
Total of $5 (5% of total income)
Group #2
Total of $10 (10% of total income)
Group #3
Total of $15 (15% of total income)
Group #4
Total of $25 (25% of total income)
Group #5 (Richest 20%)
Total of $45 (45% of total income)

13. The Lorenz Curve Perfect Equality Percent of Income
100 80 60 40 20
Perfect Equality
Percent of Income
Percent of Families
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14. The Lorenz Curve Lorenz Curve (actual distribution) Perfect Equality
100 80 60 55 40 30 20 15 5
Lorenz Curve
(actual distribution)
Perfect Equality
Percent of Income
Percent of Families

15. The size of the banana shows
The Lorenz Curve
100 80 60 55 40 30 20 15 5
Lorenz Curve
(actual distribution)
Perfect Equality
Percent of Income
The size of the banana shows
the degree of
income inequality.
Percent of Families
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16. (the size of the banana)
The Lorenz Curve
Lorenz Curve
(actual distribution)
Gini Coefficient-
Statistical measurement of income distribution. Area A divided by the sum of areas A and B
(the size of the banana)
Perfect Equality
Percent of Income
Area A
Area B
Percent of Families
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17. The Lorenz Curve
Government transfer payments shift the Lorenz Curve toward more equality
Is that good or bad?
Perfect Equality
Percent of Income
Percent of Families
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18. Where does the government get the money for welfare?
Welfare provides a safety net for citizens (retirement, unemployment, workers comp, health, etc.) BUT, what are some possible downsides?
Where does the government get the money for welfare?

19. Types of Taxes
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20. Why does the government tax?
What are Taxes?
Taxes – mandatory payments made to the government to cover costs of governing.
Why does the government tax?
Two purposes:
Finance government operations.
Public goods-highways, defense, employee wages
Fund Programs- welfare, social security
2. Influence economic behavior of firms and individuals.
Ex: Excise taxes on tobacco raises tax revenue and discourages the use of cigarettes.

21. Three Types of Taxes
1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people).
Ex: Current Federal Income Tax system
2. Proportional Taxes (flat rate) –takes the same percent of income from all income groups.
Ex: 20% flat income tax on all income groups
3. Regressive Taxes –takes a larger percentage from low income groups (takes more from poor people).
Ex: Sales tax; any consumption tax.

22. What kind of taxes are these? (THINK % of Income)
Three Types of Taxes
What kind of taxes are these? (THINK % of Income)
Toll road tax ($1 per day)
State income tax where richer citizens pay higher %
$.45 tax on cigarettes
Medicare tax of 1% of every dollar earned
8.25% California sales tax
Regressive
Progressive
Proportional

23. Federal Income Tax Debate
Equal Tax of $350 per week (Regressive Tax)
Income Amount of Tax % Amount to live on
$200 $ % -$150)[crime?]
$350 $ % $0
$500 $ % $150
$1,000 $ % $650
$5,000 $ % $4,650
Tax tax of 20% per week (Proportional Tax)
Income Amount of Tax Amount to live on
$200 $40 $160
$350 $70 $280
$500 $100 $400
$1,000 $200 $800
$5,000 $1,000 $4,000

24. Federal Income Tax Debate This is our current system. Is it fair?
The Progressive tax system is the most effective way to fight this market failure

25. Practice

26. 2008 Audit Exam
44. B

27. 2005, #2

28. 2003, #1

29. GREAT NEWS…
YOU ARE DONE WITH MICRO!!!!