Market Failures.

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Presentation transcript:

Market Failures

Review Identify the three of 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 4 different marsupials.

Market Failure #4 Unfair Distribution of Wealth Net Worth: Nothing Net Worth: over $2.3 billion

What percent of American’s are living in poverty? Why is income distribution a market failure?

Income Inequality In 2013, the average American family made $64,030. 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?

Measuring Income Distribution THE LORENZ CURVE 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% families should earn 20% 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.

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)

The size of the banana shows The Lorenz Curve 100 80 60 40 20 Lorenz Curve (actual distribution) After Distribution The size of the banana shows the degree of income inequality. 55 30 15 5 Percent of Income Perfect Equality The banana gets smaller when the government re-distributes income. 20 40 60 80 100 Percent of Population

Income Quintile U.K. Columbia China 20% 7.64% 3.60% 6.02% 40% 12.61 8.79 10.70 60% 15.96 12.89 15.81 80% 22.95 20.37 25.82 100% 40.84 54.35 41.65

A B Gini Coefficient / Index / Ratio A B 0 (Complete Equality) ~ 1 (Complete Inequality) 20 40 60 80 100 100 80 60 40 20 Percent of Population Percent of Income Perfect Equality Lorenz Curve (actual distribution) A B A B 0 (Complete Equality)  Everyone has the same income 1 (Complete Inequality)  One person has all the income, while everyone else has no income)

How is income distributed in the US How is income distributed in the US? Historical Income Table- Income Equality in USA The Gini Coefficient is a number between 0 and 1 that is a measure of Inequality.

2014 World Gini Index It is a world problem

How do we fix this?

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?

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, national defense, 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.

Three Types of Taxes 1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people). 2. Proportional Taxes (flat rate) –takes the same percent of income from all income groups. 3. Regressive Taxes –takes a larger percent of income from low income groups (takes more from poor people).

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 percent of income from low income groups (takes more from poor people). Ex: Sales tax; any consumption tax.

Progressive / Proportional / Regressive Three Types of Taxes Progressive / Proportional / Regressive (THINK % of Income) Regressive 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 Government tax 25 cents every dollar of income 8.25% California sales tax Progressive Regressive Regressive Progressive Proportional Proportional Proportional Regressive

Federal Income Tax Debate Equal Tax of $350 per week Income Amount of Tax % Amount to live on $200 $350 175% -$150 (crime?) 100% $0 $500 70% $150 $1,000 35% $650 $5,000 7% $4,650 (Regressive Tax) Tax tax of 20% per week Income Amount of Tax Amount to live on $200 $40 $160 $350 $70 $280 $500 $100 $400 $1,000 $800 $5,000 $4,000 (Proportional Tax)

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.

The Laffer Curve Shows relationship between tax rate and tax revenue. LAST micro graph to learn!!!! The Laffer Curve Shows relationship between tax rate and tax revenue. What would happen if the highest tax bracket was 75%? 25

THINK ROBIN HOOD!!!!!! What was his group’s name? Merry Men What did they do? Laugh a lot…they were “Laffers.” What was his weapon of choice? Bow and Arrow What did Robin Hood do? Steal from the rich and give to the poor. What would happen to the amount of travelers through Sherwood forest if he took 95% instead of 39% of their money? What would happen to the total amount of money he collects? 26

If the government increase taxes rates, tax revenue will increase The Laffer Curve % Tax Rate If the government increase taxes rates, tax revenue will increase If the tax rate becomes too high, tax revenue will fall since workers have no incentive to work harder Tax Revenue 27

YOU ARE DONE WITH MICRO!!!!

All you have to do now is to PASS the Final

Practice FRQs

2010 Practice FRQ 31

2005, #2

2003, #1

Review Activity: Password

Sit down when you are done Public Good Tax Positive Externality Free Rider Marginal Social Cost Round 1

Sit down when you are done Negative Externality Nonexclusion Market Failure Invisible Hand Common Pool Problem Round 2