Transcript The Mixed Economy: Private & Public Sectors

The Mixed Economy:
Private & Public Sectors
Chapter 5
Chapter Objectives
 Acquire basic knowledge regarding the
household & business components of the
private sector economy
 Acquire basic knowledge of the public
sector in the U.S. Economy
National Income Distribution
 Wages & Salaries (70%)
 Proprietor (Self Employed) Income (9%)
 Capitalist Income (Corporations profits +
rent + interest (12%)
 Largest component of capitalist income is
the profits of corporations
 The sum total of all these is defined as
“National Income” (NI) and will be used in
calculating GDP
Personal Income (PI)
 3 different categories
 Taxes
 Savings
 Spending (Consumption) By far the largest
and most encouraged for the last half
century
 Our consumption drives the global
economy, and perhaps, right off the cliff
Consumer Spending
 Divided into three categories
 Durable goods – More than 3 years
 Non-durable goods – Less than 3 years
 Services
The Business Population
 Plant – Physical establishment where
production or distribution takes place
 Firm – Business organization that owns
the plants
 Industry – Group of related firms
 Multi-plant Firms – Includes those firms
that have been integrated both horizontally
& vertically
Types of Businesses
 Sole Proprietorship – Individually owned,
easy to set up, profits undivided, quick
decision making / Limited Resources,
Unlimited Liability
 General Partnership – Two or more
operate under partner agreement, more
specialized, more resources / Decisions
and profits are both divided, still unlimited
liability
Types of Businesses Cont’d
 Corporations – Legal entity distinct from
the individual owners, Board of Directors &
Shareholders, Usually have access to
greater amounts of capital, limited liability /
Bureaucratic in nature, Conflicting
Interests (Principle Agent Problem)
 Hybrid Structures – Limited Liability
Company (LLC) , S-Corps
Public Sector – Government Role
 Enforces laws, property rights, contracts,
acts as a referee in matters of dispute and
regulates behavior and imposes penalties
for wrong doing
 Helps to allocate resources, provide
markets, ensures product quality & safety
 Appropriate regulation is at the level where
cost = benefit
Government & Competition
 Competition forces producers to respect
consumer sovereignty
 Monopoly power allows for producers to
supplant the consumer and impose its own
power
 Natural monopolies occur when
technological or economic realities make a
monopoly more efficient – Gov’t will then
regulate price & service
Actions in Regards to Monopolies
 Sherman Anti-Trust 1890
 Clayton Act of 1913
 More recently . . . .
 Justice Department in the 1990s targeted
Microsoft
 NBA, NFL, & MLB
 Clear Channel in the world of radio
Redistribution of Income
 Taxes (Wealthier pay higher percentage)
 Transfer payments (Medicare, SS,
Welfare, Unemployment Insurance)
 Price support program such as subsidies
for Farmers
Spillover and Negative Externalities
 Results that occur from industrialization,
both positive & negative, may require
government involvement to ensure public
safety or stop corrupt business practices
 E-Waste, Pollution, etc.
 http://www.cbsnews.com/video/watch/?id=
4586903n
Resource Allocation
 Market failures occur when resources are
allocated improperly
 The Government must assure that
spillover cost is absorbed by those
causing it.
 Ex – BP Oil Spill
Provider of Public Goods
 Certain goods that cannot be divided (their
use cannot be individualized) and
therefore become public goods.
 National Defense, Public Safety
 Not enough people would demand these
services so the Government provides and
then pays through tax revenues
Exclusion Principle
 The idea that a buyer will be excluded
from the benefits of product that he does
not purchase.
 Applies to private goods, not however to
public or quasi-public goods
 Those who benefit from goods and
services they do not pay for are labeled
“free riders.”
Promoting Stability
 Responsibility of the Federal Reserve
 Policy is to tax and save if inflation
threatens, lower taxes and spend when
economy is struggling
Government Finance
 Government purchases directly use
resources to produce goods and services
that are measured when calculating GDP
Transfer payments are excluded
Since 1960, transfer payments have
drastically increased
Federal Finance
Where does it get spent?
 National Defense
 Public Health
 Interest on National Debt
 Income Security
Federal Finance
Where do we get the money?
Personal Income Tax
This is a progressive tax as it accelerates
with higher incomes
Others Sources of Revenue
 Payroll Tax – SS contributions, etc.
 Corporate Tax
 Excise Tax – Tax on a specific good
 State & Local Governments obtain
revenue through sales tax & property tax
 Money is used for education and public
welfare