Chapter5in2005

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Education

Published on April 13, 2008

Author: Christo

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Slide1:  Up Coming Stuff Quiz Chapter 5 Friday, 10/14 Bonus Work Chapter 5 Monday, 10/17 All homework Chapters 4 & 5 Tuesday, 10/18 Review Wednesday, 10/19 Test on Chapter 4 & 5 – Thursday, 10/20! GHS English Dept. GHS English Dept. Pure Capitalism to Mixed Economy.:  Pure Capitalism to Mixed Economy. If you could choose anywhere in the world to live where would it be and why???? If you had to rate countries in the world in terms of their standards of living what characteristics would you use and why? The next chapter begins to look at how the government intervenes in an economic system to allocate resources. Chapter 5 gets us into some debatable issues dealing with tax rates, subsidies, social equality etc.. Does the government hurt or help?? While watching the video look for those issues we have talked about with reference to how a capitalist economy works best. Also look for the policies of the government that lead to inefficiencies. Slide3:  BUSINESSES subsidy HOUSEHOLDS FICA RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE Tax Payments GOVERNMENT Slide4:  private property freedom of enterprise freedom of choice self-interest competition roundabout production specialization division of labor medium of exchange barter money Five Fundamental Questions economic costs normal profit economic profit expanding industry declining industry consumer sovereignty dollar votes derived demand guiding function of prices “invisible hand” The Mixed Economy::  The Mixed Economy: Private and Public Sectors The Seven Roles of Government::  The Seven Roles of Government: 1. Maintain Competition 2. Protect Private Property (Life & Liberty) 3. Stabilize the Economy 4. Provide Public Goods: (Pure Private, Common Pool, Toll Goods, Pure Public) 5. Control Externalities/Spillovers: (Pollution Control v Schools) 6. Taxes – Redistribute Income Slide7:  FUNCTIONAL DISTRIBUTION WAGES RENT INTEREST PROFIT/LOSS Slide8:  FUNCTIONAL DISTRIBUTION WAGES RENT INTEREST PROFIT/LOSS PERSONAL DISTRIBUTION SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL HOUSEHOLDS I. How to measure economic activity?:  I. How to measure economic activity? A. Functional Distribution of Income 1. Measures wages, profits, interest and rent. 2. Profits are divided into two categories. - proprietors income – profits of those self-employed, doctors, lawyers, farmers. - Capitalist income or corporation income/ profits. Slide10:  WAGES $7,103 Billion 71% PROPRIETOR’S INCOME 900 Billion 8% CORPORATE PROFITS 1,400 Billion 12% INTEREST 700 Billion 7% RENTS 200 Billion 2% FUNCTIONAL DISTRIBUTION Slide11:  WAGES $7,103 Billion 70% PROFITS $2,349 Billion 21% INTEREST $750 Billion 7% RENT $200 Billion 2% FUNCTIONAL DISTRIBUTION 2004 GDP WEASEL PUSS IS RED! $10,402 Billion I. How to measure cont…:  I. How to measure cont… B. Personal Distribution of Income 1. Indicates how much total income is divided among household units. 2. The government uses this as a reference to how equitable or inequitable income is distributed in the U.S. 3. The Lorenz Curve is a mathematically derived index of income inequality. Slide13:  PERSONAL DISTRIBUTION Personal Income Received (Percent) 2004 US Census Bureau Share of Income - Historically:  Share of Income - Historically Slide15:  The Lorenz Curve 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Copyright McGraw-Hill, Inc. 1999 Slide16:  The Lorenz Curve 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Copyright McGraw-Hill, Inc. 1999 Slide17:  The Lorenz Curve 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality Copyright McGraw-Hill, Inc. 1999 Slide18:  The Lorenz Curve 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality Copyright McGraw-Hill, Inc. 1999 Slide19:  30 40 50 60 70 Percentage of total income earned by top fifth of income receivers Brazil South Africa Guatemala Mexico United Kingdom United States Japan Norway Slide20:  Percentage of total income earned by top 20% of income receivers Brazil South Africa Guatemala Mexico United States United Kingdom Japan Norway 30 40 50 60 70 Executive Pay in some US. Industries is 300 Times Higher than an Average Worker’s Salary. Slide21:  1 - Demand for Highly Skilled Workers 2 - Demographic Changes 3 - International Trade & Pressures - Immigration + Illegal Immigration - Union Decline The Lorenz Curve AP Test 2004 graphically... Causes of Growing Inequality Wage Data 138,000,000 US Workers:  Wage Data 138,000,000 US Workers 100,000,000 full time US workers in 2001 earned less than $35,000/yr. 84% earned less than $65,000 10% earned between $65,000 and $100,000 5.7% earned more than $100,000 US News and World Report Wage Data – Median Income for a Person:  Wage Data – Median Income for a Person Median Income: $33,636 Only 32.8% of all US jobs paid over $45,000 Two-thirds of all wage earners work two jobs Two-thirds of all mothers with children now work Median paycheck for working wives: $18,000 US News and World Report Median Household Income: 2003 :  Median Household Income: 2003 USA Median Household Income: $42,409 Half of US households earn more and half of US households earn less 1999 Peak Median US Income: $43,915 Wisconsin: $45,985 Half of WI households earn more and half of WI households earn less Source: US Census Bureau Working Mothers:  Working Mothers 71.1 percent of mothers work 53.7 percent of mothers with children under 1 year work Unemployment Rate for unmarried mothers with children under age 18: 10.3% Jobless Rate 20.5% Vote Kerry Bush Working Poor:  Working Poor Of the 46,000,000 Americans who are not yet married, median earnings $17,000 For single women-head of households, median income: $18,472 39,000,000 Working Poor:  39,000,000 Working Poor One in five full time 40 hr./week US jobs pays below the poverty-line $18,244 for a family of four 20,000,000 children live in families with incomes below the poverty line Milwaukee Journal 28,000,000 Jobs:  28,000,000 Jobs 28,000,000 service jobs pay less than $8.84 $8.84 is the hourly rate that matches the poverty-line $18,244 Milwaukee Journal Helping the 39,000,000 Working Poor:  Helping the 39,000,000 Working Poor Suggested Solutions??? Adult Education! Job Training Increased Minimum Wage Subsidize Child Care for low income workers Help is On the Way? Milwaukee Journal $36,388 – Low Income Family:  $36,388 – Low Income Family A family of four living on an annual income of $36,388 is considered to be a low income family A family of four living on an annual income of $18,244 is considered to be living in poverty. Milwaukee Journal Median Incomes US Families:  Median Incomes US Families White: $47,800 Hispanic: $33,000 African American: $29,600 Milwaukee Journal Median Family Net Worths:  Median Family Net Worths White Families: $88,000 up 17% since 1996 Hispanic Families: $8,000 up 14% since 1996 African American Families: $6,000 down 16% since 1996 Milwaukee Journal Slide33:  The Lorenz Curve 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality Copyright McGraw-Hill, Inc. 1999 Slide34:  1 - Ability Differences 2 - Education and Training 3 - Discrimination 4 - Tastes and Risks 5 - Unequal Distribution of Wealth 6 - Market Power 7 - Luck, Connections, and Misfortune EQUALITY-EFFICIENCY TRADEOFF CAUSES OF INCOME INEQUALITY Slide36:  Labor Market Theory The Real World Will Get You! Human Capital Education = Income Sorting Mechanism Hoops Radical View Rich Dad Poor Dad Dual Labor Market Good Job v Bad Job Market Family Income USA:  Family Income USA 9.8% $100,000+ 8.9% $75-99,999 19% $50-74,999 16.3% $35-49,999 13% $25-34,999 14.4% $15-24,999 18.6% <$15,000 Family Income Distribution 2001:  Family Income Distribution 2001 $355,000 Top 1% $130,600 Top 5% $93,800 Top 10% 60,800 Top 25% 33,400 Top 50% Slide41:  38,500,000+: Men, Women, and Children(13.1%) The typical poor person in the US: Single Mom with Kids! White unemployed female under forty Found everywhere including Ozaukee County (2200+)! Slide42:  $18,810 for a family of four! $12,015 for a family of two! $9,573 for a single person!! Of the 200 largest US counties Waukesha with 3.0% of its residents in Poverty ranked second lowest in the US. Of all 5,700+ US counties Ozaukee with 2.2% of its Residents in Poverty ranked third lowest in the US. Wisconsin Poverty:  Wisconsin Poverty 528,000 people or 9.8% of WI residents WI residents without health insurance 593,000 National rank 36th lowest poverty in poverty rate Poverty in America: 2003 Data:  Poverty in America: 2003 Data 37.6 Million Americans Up 1.7 million from 2002 12.1 million are children 12.1% of Americans Wisconsin’s poverty rate 2003: 8.2% Poverty Line 2003: $18,244 for a family of 4 $9,359 for a single person Source: US Census Bureau, Journal/Sentinel State Rankings on Poverty Families Living Below the Poverty Line:  State Rankings on Poverty Families Living Below the Poverty Line Mississippi 16.0% Louisiana 15.8% New Mexico 14.5% West Virginia 13.9% Kentucky 12.7% 46. Iowa 6.0% 47. Connecticut 5.6% 48. Wisconsin 5.5% 49. Minnesota 5.1% 50. New Hampshire 4.3% Total US Poor: 32,500,000 Average Per State: 9.2% State Rankings on Families Receiving Welfare:  State Rankings on Families Receiving Welfare Alaska 8.7% Hawaii 7.2% Oklahoma 5.1% California 4.9% New York 4.9% 46. Maryland 2.4% 47. Kansas 2.36% 48. Nevada 2.35% 49. Alabama 2.24% 50. Wisconsin 1.71% Total Welfare Recipients: Less than 22,000,000 The Working Poor:  The Working Poor Income less than $8.00/Hour Yearly incomes less than $25,000 for a family of 4 30% of Americans: 74,000,000 people! Uninsured Americans 58,000,000 The Working Poor:  The Working Poor Hourly wages needed to afford a One Bedroom Apartment $8.89 Chance of a Welfare Recipient getting a $8.89/Hour Forty Hour/Week Job? 97 to 1 Want Ads Data: National Coalition for the Homeless Functional Distribution of Income:  Functional Distribution of Income How is the 10.4 Trillion Dollars earned in the Economy? Slide50:  PERSONAL DISTRIBUTION Personal Income Received (Percent) How is that income allocated??? What is in societies best interest??? C. Household Income! Disposal Spending+Saving+Taxes=GDP:  C. Household Income! Disposal Spending+Saving+Taxes=GDP W+P+i+R Weasel puss is red 1. All Income is spent or saved or lost to taxes! What is the distribution of spending, saving, and taxes? GDP Another way to measure!!! Slide52:  6% WHERE DOES OUR INCOME GO? to personal savings Milwaukee Journal Slide53:  6% to personal taxes excluding Social Security Affective tax rate for Americans: 14% + 7.5% = 21.5% Taxes as % of GDP = 29.9% 14% WHERE DOES OUR INCOME GO? Taxes as a Percent of GDP:  Taxes as a Percent of GDP Sweden 56.1% Denmark 49.9% Netherlands 46.0% Belgium 44.3% France 43.8% Austria 41.0% Germany 38.1% Italy 37.8% Ireland 37.6% Britain 36.5% Canada 35.3% Spain 34.4% Greece 33.2% Japan 30.6% Australia 30.1% USA 29.9% Source OECD Slide55:  6% to personal consumption 14% 80% WHERE DOES OUR INCOME GO? S A V I N G S T A X E S Consumer Spending about 80% of income Slide56:  WHERE DOES OUR INCOME GO? 6% to personal consumption 14% 83% Slide57:  WHERE DOES OUR INCOME GO? 6% to personal consumption 14% 83% Slide58:  WHERE DOES OUR INCOME GO? 6% to personal consumption 14% 83% II. Business Organizations Plant – Firm - Industry:  II. Business Organizations Plant – Firm - Industry Proprietorships Partnerships Corporations Hybrids Bush Slide61:  A. Terminology.... 1- PLANT Slide62:  1- PLANT 2- FIRM A. Terminology.... Slide63:  Terminology.... 1- PLANT 2- FIRM NOTES: Vertical Combinations Slide64:  Terminology.... 1- PLANT 2- FIRM NOTES: Horizontal Combinations Vertical Combinations Slide65:  Terminology.... 1- PLANT 2- FIRM NOTES: Horizontal Combinations Vertical Combinations Conglomerates Slide66:  A. Terminology.... 1- PLANT 2- FIRM 3- INDUSTRY B. US Business Organizations:  B. US Business Organizations Proprietorships 75% 17,000,000 Partnerships 7% 1,500,000 Corporations 18% 4,000,000 Hybrids/Corps 500,000 23,000,000 1. Type of Business Percent of Market Total Number (Both Bush and VP Dick Cheney claimed in the last year’s debates that 900,000 "small businesses" would be hurt by restoration of taxes on $200,000+ incomes.) Small Businesses US:  Small Businesses US The United States Small Business Administration classifies companies with fewer than 500 employees as "small." There are more than 5 million such businesses that have payrolls, and they employ about half of the nation's private-sector workers. Of those 5 million firms, 4.3 million have fewer than 20 employees each. The small business owner's reputation as underdog and risk-taker is a hard-earned one. Every year sees 600,000 to 800,000 companies start up, just as 500,000 or so go under. Let's give credit where credit is due. Bush has cut taxes for all Americans, which has helped small business owners continue to generate 60 to 80 percent of all new jobs annually. (US Chamber of Commerce) B. US Business Organizations:  B. US Business Organizations Proprietorships 6% Partnerships 5% Corporations 89% 2. Type of Business Percent of Market Sales Top 10 US Corporations by Revenues:  Top 10 US Corporations by Revenues Wal-Mart $217,799,000,000 Exxon Mobile $187,510,000,000 General Motors $177,260,000,000 Ford Motor $162,412,000,000 General Electric $125,679,000,000 Citigroup $112,022,000,000 Chevron Texaco $106,245,000,000 Philip Morris $89,942,000,000 IBM $85,866,000,000 Microsoft $83,654,000,000 Top 10 International Corporations by Revenues:  Top 10 International Corporations by Revenues Wal-Mart $217,799,000,000 Exxon Mobile $187,510,000,000 Shell $177,281,000,000 General Motors $177,260,000,000 Ford Motor $162,412,000,000 Daimler Chrysler $152,446,000,000 BP $148,062,000,000 General Electric $125,679,000,000 Citigroup $112,022,000,000 Mitsubishi $110,787,000,000 Slide74:  1. Sole Proprietorship Easy to Organize Proprietor is Own “Boss” Advantages... Slide75:  1. Sole Proprietorship Easy to Organize Proprietor is Own “Boss” Advantages... Disadvantages... Limited Resources No Help With Decision Making Unlimited Liability Slide78:  2. Partnership Advantages... Also Easy to Organize More Management Skills Greater Resources Available Slide79:  2. Partnership Disadvantages... Advantages... Also Easy to Organize More Management Skills Greater Resources Available Difficulty Making Decisions Possibly Limited Financial Resources Partnership Continuity Problems Unlimited Liability Slide82:  3. Corporation Advantages... Most Effective Raising Capital - Stocks, Bonds Limited Liability****** Easy Expansion of Size & Scope Infinite Life Slide83:  Corporation Advantages... Most Effective Raising Capital - Stocks, Bonds Limited Liability Easy Expansion of Size & Scope Infinite Life Disadvantages... Corporate Regulations & Legal Expenses Some Unscrupulous Practices Double Taxation Separation of Ownership & Control Slide84:  Corporation Advantages.... Most Effective Raising Capital - Stocks, Bonds Limited Liability Easy Expansion of Size & Scope Infinite Life Disadvantages Corporate Regulations & Legal Expenses Some Unscrupulous Practices Double Taxation Separation of Ownership & Control NOTES: Principal-Agent Problem Principle Agent Problem:  Principle Agent Problem Partnership and Proprietorship the owner/owners is/are the principle agents! Corporate America has a board of directors and CEO that serve as the principle agents for stockholders! Ken Lay – CFO Enron B U S H 10 Highest Paid CEO’s in the US December 2001:  10 Highest Paid CEO’s in the US December 2001 Michael Dell Dell Computers $235,192,000 Sanford Weill Citigroup $216,183,000 Gerald Levin AOL Time Warner $164,388,000 John Chambers Cisco Systems $157,305,000 Henry Silverman Cendant $137,447,000 Louis Gerstner Jr. IBM $103,410,000 Joseph Nacchio Qwest Com. $97,387,000 Walter Sanders Advanced Micro $92,246,000 Steven Jobs Apple Computers $90,000,000 Jeffery Skilling Enron $84,449,000 Corporations:  Corporations 90% of Revenue 80% of Output Wal-Mart’s revenue greater than the GDP of 170 nations Wal-Mart and GM combined revenues exceed total revenue of all US farms combined Slide88:  Corporation Advantages... Most Effective Raising Capital - Stocks, Bonds Limited Liability Easy Expansion of Size & Scope Infinite Life Disadvantages... Corporate Regulations & Legal Expenses Some Unscrupulous Practices Double Taxation Separation of Ownership & Control Slide89:  Corporation Advantages.... Most Effective Raising Capital - Stocks, Bonds Limited Liability Easy Expansion of Size & Scope Infinite Life Disadvantages Corporate Regulations & Legal Expenses Some Unscrupulous Practices Double Taxation Separation of Ownership & Control NOTES: Limited- Liability Companies (LLCs) 4. Hybrids:  4. Hybrids LLC Taxed like a partnership Limited Liability like a corporation S-Corporations Fewer than 35 employees Limited liability No double taxation III. Five Major Roles of Government in a Capitalist Economy:  III. Five Major Roles of Government in a Capitalist Economy Provide Social and Legal Framework Maintain Competition Redistribute Income Correct Market Failure Stabilize the Economy Slide92:  A. LEGAL AND SOCIAL FRAMEWORK 1. Seeks to strengthen the market system. Slide93:  B. MAINTAINING COMPETITION “Microsoft will Rule the World!’ Bill Gates 2002 Slide94:  MAINTAINING COMPETITION Notes: 1.MONOPOLY- illegal Slide95:  MAINTAINING COMPETITION Notes: 1.MONOPOLY- illegal 2. NATURAL MONOPOLIES Slide96:  MAINTAINING COMPETITION Notes: 1. MONOPOLY- illegal 2. NATURAL MONOPOLIES MARKET BIASES & SHORTCOMINGS CAN COMPEL ACTION BY GOVERNMENT Slide97:  C. REDISTRIBUTION OF INCOME.... 1. Transfer Payments Slide98:  Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military $2,260.00 goes to pay the interest on the national debt $1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing $160.00 goes to the environment $40.00 goes to job training $1,400.00 goes to all other expenses Excludes FICA @ 7.5% Ten Largest Militaries in the World:  Ten Largest Militaries in the World China 2,340,000 US 1,365,800 India 1,303,000 North Korea 1,082,000 Russia 1,004,000 South Korea 683,000 Pakistan 612,000 Turkey 609,000 Iran 513,000 Vietnam 484,000 Total US Military Spending: $352,000,000,000 Top Military Spenders:  Top Military Spenders USA $352,000,000,000 Japan $46,700,000,000 Britain $36,000,000,000 France $33,600,000,000 China $31,100,000,000 Germany $27,700,000,000 Saudi Arabia $21,600,000,000 Italy $21,100,000,000 Iran $17,500,000,000 South Korea $13,500,000,000 India $12,900,000,000 Russia $11,400,000,000 The sum of spending by the other top 25 countries does not equal US spending! Countries with the Highest Life Expectancy:  Countries with the Highest Life Expectancy Japan 81.5 yrs. Sweden 80.1 yrs. Iceland 79.4 yrs. Australia 79.2 yrs. Israel 79.2 yrs. Martinique 79.1 yrs. Switzerland 79.1 yrs. Canada 79.0 yrs. France 79.0 yrs. Norway 78.9 yrs. USA 77.5 Worldwide 66.0 Slide102:  C. REDISTRIBUTION OF INCOME.... 1. Transfer Payments 2. Personal Income Tax Taxes in the USA:  Taxes in the USA 3. Theories of Taxation: Ability to Pay Benefits Received 4. Types of Taxes: Progressive Proportional Regressive Slide104:  Apportioning the Tax Burden Benefits-Received Principle Slide105:  Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Slide106:  Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Progressive Tax & Marginal Tax Rates! Progressive Tax:  Progressive Tax The fraction of income paid in taxes increases as a person’s income increases. Marginal tax rate - rate at which the tax is paid on each additional unit of income. Example - Earning $50,000 – What do you pay in taxes given the following rates? 1 – 41,200 15% 41,201 – 99,600 28% 99,601 – 151,750 31% 151,751 – 271,050 36% 271,050 - 39.6% $8,644 What is your average tax?? 17% Slide108:  Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Progressive Tax Regressive Tax Slide109:  Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Progressive Tax Regressive Tax Proportional Tax Proportional and Regressive:  Proportional and Regressive Proportional is a tax where the fraction of income paid in taxes remains constant as a person’s income increases. A flat tax. Regressive is a tax where the fraction of income paid in taxes increases the lower your income. Sales taxes are what seem to be a proportional tax but indeed are regressive. Example Family 1 Family of 4 Family 2 35,000 75,000 5,000 Food expenses 5,000 6% tax rate – flat tax 6% $300 tax paid $300 .8% of income .4% Slide111:  Tax Applications: Personal Income Tax Sales Tax Corporate Income Tax Payroll Taxes Property Taxes Identify whether progressive, regressive, or proportional Taxes as a Percent of GDP:  Taxes as a Percent of GDP Sweden 56.1% Denmark 49.9% Netherlands 46.0% Belgium 44.3% France 43.8% Austria 41.0% Germany 38.1% Italy 37.8% Ireland 37.6% Britain 36.5% Canada 35.3% Spain 34.4% Greece 33.2% Japan 30.6% Australia 30.1% USA 29.9% Source OECD Slide113:  C. REDISTRIBUTION OF INCOME.... 1. Transfer Payments FICA to People Market Intervention Minimum wages and subsidies. 2-4. Taxes Slide114:  D. REALLOCATION OF RESOURCES.... The government will intervene when it feels a market failure has taken place. The market produces the wrong type or amount of goods. The market fails to allocate any resources for the production of a good. Slide115:  D. REALLOCATION OF RESOURCES.... 4. Spillovers or Externalities - Spillover Costs When a producer avoids some of the costs of producing a product. Example – pollution A larger output is produced than is socially acceptable. Slide116:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Costs - Correcting For Spillover Costs Legislation Slide117:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Costs Correcting For Spillover Costs Legislation Specific Taxes Slide118:  P Q Correcting for Spillover Costs D 0 Spillover costs Overallocation s + Tax S Price too Low! Qd = Qs Amount of Tax needed to correct Negative externality! New market price paid by consumers Slide119:  P Q Correcting for Spillover Costs D 0 Spillover costs S + Tax S TAX To Fix Spillover cost Overallocation Corrected Tax Consumer pays Producer Receives Slide120:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits The Underallocation of Resources You don’t directly get all the utility or receive all the benefits, so you don’t consume as much as you could if you did receive all of the benefits. Example - Education Slide121:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... Increase Demand Slide122:  P Q Correcting for Spillover Benefits D S 0 D + Subsidy Spillover Benefits Underallocation Correction Initially priced too low!!! Federal Grants for Education Slide123:  P Q Correcting for Spillover Benefits D S 0 D + Subsidy Subsidy to consumer Underallocation Corrected Amount of the subsidy needed to correct externality! Price is Increased! Slide124:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... Increase Demand Increase Supply Slide125:  P Q Correcting for Spillover Benefits D 0 Subsidy to producers S S + Subsidy Subsidy to business Underallocation Corrected Price for consumers falls Madison costs less than Marquette Slide126:  REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... Increase Demand Increase Supply Government Provision 5. Ownership Rights:  5. Ownership Rights Some goods need to be produced because they produce a societal benefit but would not be produced if the gov’t did not intervene. In order to determine when the gov’t should intervene they classify goods according to categories. Exclusion principle - One of the main determining factors is if the good will be adequately produced in the market. Does the purchaser have an exclusive right to that good? Pure Private Goods:  Pure Private Goods No Shared Consumption! Exclusion permitted! Hands off my burger!! Depletability Toll Goods:  Toll Goods You pay to use a resource Using the resource doesn’t deplete its supply or usefulness You may be denied use if you fail to pay Applies to private goods Pure Public Goods:  Pure Public Goods Indivisible – too large for individuals to consume. Free Rider Problem The benefits to one user does not exceed the cost! Highways, space shuttle, aircraft carrier Slide131:  Private Goods: Divisibility & Depletability Public Goods: Indivisible Slide132:  Public or Social Goods Are... Indivisible Subject to the free-rider problem May Provide Large Spillover Benefits Quasi-public Goods Can be produced by market or government but have large spillover benefits. Common Pool Goods:  Common Pool Goods Joint ownership Fish in Lake Michigan The UN plan to save the Whales and Dolphin Gate Foundation to purchase from UN all whales and dolphins! Slide134:  Note: The Exclusion Principle Does Not Apply Slide135:  Note: The Exclusion Principle Does Not Apply Some Goods & Services Would Not Be Produced By The Market System Public or Social Goods Are... Slide136:  The Free Rider Problem: Visitors to Ozaukee County may use this public good even if they have never paid at tax in this county. Slide137:  Public or Social Goods Are... Indivisible Subject to the free-rider problem May Provide Large Spillover Benefits E. Stabilization of the Economy:  E. Stabilization of the Economy 1. Should the Government take a Role? 2. Action is taken to deal with issues of unemployment and inflation. Slide139:  STABILIZATION....when Cut Taxes Raise Government Spending Run a Deficit GDP: Growing to Slowly Or High Unemployment Slide140:  STABILIZATION.... GDP: Growing too Fast Prices Rising out of Control Raise Taxes Cut Government Spending Run a Surplus Slide141:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide142:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide143:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide144:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide145:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide146:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide147:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide148:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide149:  BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Slide150:  BUSINESSES subsidy HOUSEHOLDS FICA RESOURCE MARKET RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE Tax Payments GOVERNMENT The Federal Budget!:  The Federal Budget! Total Revenues (Taxes) – Total Costs (Expenditures) + Budget Surplus 0 Balanced Budget - Budget Deficit 2004 Deficit: $480 Billion Sum of all yearly deficits is the National Debt of: 7.4 Trillion Dollars! Projected 2005 333 Billion Slide152:  GOVERNMENT GROWTH Purchases & Transfers... Government Purchases Slide153:  GOVERNMENT GROWTH Purchases & Transfers... Transfer Payments Government Purchases Slide154:  The Federal Budget Federal Expenditures How Does Government Spend Its Money???? Slide155:  The Federal Budget Federal Expenditures Income Security 38% Slide156:  The Federal Budget Federal Expenditures Income Security 38% Health 20% Slide157:  The Federal Budget Federal Expenditures Income Security 38% Health 20% National Defense 18% Slide158:  The Federal Budget Federal Expenditures Income Security 38% Health 20% National Defense 18% Interest on Public Debt 15% Slide159:  The Federal Budget Federal Expenditures Income Security 38% Health 20% National Defense 18% Interest on Public Debt 15% All Other 9% Slide160:  The Federal Budget Funded on a Percentage Basis of Income Tax Dollars 26.2% goes to the military 22.6% goes to pay the interest on the national debt 19.0% goes to health care 5.5% goes to income security 3.4% goes to benefits for veterans 3.2% goes to education 2.5% goes to nutrition spending 1.6% goes to housing 1.6% goes to the environment 0.4% goes to job training 14.0% goes to all other expenses Remember….. FICA funds Social Security Payments! Slide161:  Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military $2,260.00 goes to pay the interest on the national debt $1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing $160.00 goes to the environment $40.00 goes to job training $1,400.00 goes to all other expenses Excludes FICA @ 7.5% Slide162:  The Federal Budget Federal Receipts/Revenues How Does Government Raise Its Money???? Slide163:  The Federal Budget Federal Receipts/Revenues Personal Income Tax 45% Slide164:  Personal Income Tax 45% The Federal Budget, 1996 Federal Receipts Slide165:  Personal Income Tax 45% The Federal Budget, 1996 Federal Receipts Slide166:  The Federal Budget Federal Receipts/Revenues Personal Income Tax 45% Payroll Taxes 35% Slide167:  The Federal Budget Personal Income Tax 45% Payroll Taxes 35% Corporate Income Tax 12% Federal Receipts/Revenues Slide168:  The Federal Budget Personal Income Tax 45% Payroll Taxes 35% Corporate Income Tax 12% Excise or Sales Taxes 4% Federal Receipts/Revenues Slide169:  The Federal Budget Personal Income Tax 45% Payroll Taxes (FICA) 35% Corporate Income Tax 12% Excise or Sales Taxes 4% All Other 4% Federal Receipts/Revenues Slide170:  STATE & LOCAL FINANCE State Expenditures Public Welfare 32% 1994 DATA Slide171:  Public Welfare 32% Education 21% 1994 DATA State Expenditures STATE & LOCAL FINANCE Slide172:  Public Welfare 32% Education 21% Health & Hospitals 10% 1994 DATA State Expenditures STATE & LOCAL FINANCE Slide173:  Public Welfare 32% Education 21% Health & Hospitals 10% Highways 10% 1994 DATA State Expenditures STATE & LOCAL FINANCE Slide174:  Public Welfare 32% Education 21% Health & Hospitals 10% Highways 10% Public Safety 8% 1994 DATA State Expenditures STATE & LOCAL FINANCE Slide175:  Public Welfare 32% Education 21% Health & Hospitals 10% Highways 10% Public Safety 8% All Other 21% 1994 DATA State Expenditures STATE & LOCAL FINANCE Slide176:  State Receipts Sales Taxes 49% 1994 DATA STATE & LOCAL FINANCE Slide177:  State Receipts Sales Taxes 49% Income Taxes (Personal & Corporate) 32% 1994 DATA STATE & LOCAL FINANCE Slide178:  State Receipts Sales Taxes 49% Income Taxes (Personal & Corporate) 32% Corporate Income Tax 7% 1994 DATA STATE & LOCAL FINANCE Slide179:  State Receipts Sales Taxes 49% Income Taxes (Personal & Corporate) 32% Corporate Income Tax 7% Property Taxes 2% 1994 DATA STATE & LOCAL FINANCE Slide180:  State Receipts Sales Taxes 49% Income Taxes (Personal & Corporate) 32% Corporate Income Tax 7% Property Taxes 2% Death & Gift Taxes 1% 1994 DATA STATE & LOCAL FINANCE Slide181:  State Receipts Sales Taxes 49% Income Taxes (Personal & Corporate) 32% Corporate Income Tax 7% Property Taxes 2% Death & Gift Taxes 1% Licenses Other Taxes 9% 1994 DATA STATE & LOCAL FINANCE Slide182:  Local Expenditures 1994 DATA Education 42% STATE & LOCAL FINANCE Slide183:  Local Expenditures 1994 DATA Education 42% Welfare, Health, & Hospitals 14% STATE & LOCAL FINANCE Slide184:  Local Expenditures 1994 DATA Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% STATE & LOCAL FINANCE Slide185:  Local Expenditures 1994 DATA Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% Public Safety 10% STATE & LOCAL FINANCE Slide186:  Local Expenditures 1994 DATA Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% Public Safety 10% Highways 5% STATE & LOCAL FINANCE Slide187:  Local Expenditures Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% Public Safety 10% Highways 5% All Others 21% 1994 DATA STATE & LOCAL FINANCE Slide188:  Local Receipts Property Taxes 75% 1994 DATA STATE & LOCAL FINANCE Slide189:  Local Receipts 1994 DATA Property Taxes 75% Sales & Excises 15% STATE & LOCAL FINANCE Slide190:  Local Receipts 1994 DATA Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% STATE & LOCAL FINANCE Slide191:  Local Receipts Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% 1994 DATA STATE & LOCAL FINANCE Slide192:  Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% Local Receipts 1994 DATA STATE & LOCAL FINANCE Slide193:  Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% Local Receipts Fiscal Federalism 1994 DATA STATE & LOCAL FINANCE Slide194:  Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% Local Receipts 1994 DATA STATE & LOCAL FINANCE Fiscal Federalism Slide195:  functional distribution of income personal distribution of income durable good non-durable good services plant firm vertical combination horizontal combination conglomerate combination industry sole proprietorship partnership corporations stocks bonds limited liability double taxation principal-agent problem Copyright McGraw-Hill, Inc. 1999 Page 2 Slide196:  monopoly spillover costs spillover benefits exclusion principle public goods free-rider problem quasipublic goods government purchases transfer payments personal income tax marginal tax rate average tax rate payroll taxes corporate income tax sales & excise taxes property tax fiscal federalism lotteries Copyright McGraw-Hill, Inc. 1999 Page 1 Slide197:  Next: The United States in the Global Economy Chapter 6

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