Market Failure and Government

The Role of Government and Market Failure

Public v. Private Goods Excludability- Can producer keep benefits from those who do not pay? Excludable Non-Excludable Rivalry- Does use by one reduce usefulness to others? Rival Nonrival

Public v. Private Goods Pure Private Pure Public Excludable and Rival Example: Chia Pets Pure Public Nonexcludable and Nonrival Example: National Defense Government generally must provide Free Rider Problem Solutions: taxes versus donations

Free Rider Problem People get benefit from good/service without paying for it. Market will underprovide Solution Government provides and taxes Market provides and seeks donations

Free Rider

Free Rider Solutions Government provides public goods using tax dollars Public shaming?

Public v. Private Goods Toll Goods Common-pool Resources Excludable and nonrival Example: Cable TV, Toll Road (often natural monopolies) Common-pool Resources Nonexcludable and rival Example: fish in the public waters, congested roads Government often regulates Quotas, licensing fees

True or False (according to economists) The government should mandate that all cars produce zero emissions by 2020.

True or False (according to economists) The government should mandate that cars meet efficiency standards such that the marginal social cost of reducing emissions is equal to the marginal social benefit.

Externalities Unintended consequences of production or consumption that hurt (negative) or help (positive) an uninvolved third party *Someone other than the producers and consumers

Externalities Negative Externality: Positive Externality: Marginal Social Cost > Marginal Social Benefit Positive Externality: Marginal Social Benefit > Marginal Social Cost *Socially Optimal: Marginal Social Benefit = Marginal Social Cost *Requires government intervention when externalities exist

MSB = MSC

Per Unit Tax = to Marg. External Cost will eliminate DWL

Per Unit Subsidy = Marg. External Benefit will eliminate DWL

Schedule M- Externalities and Tax Intro T- Taxes and Wealth Inequality W- Other Market Failures and Gov’t Failures TH- QUIZ Friday- On Your Back Graph Review T and W- Bull’s eye Physical Challenge TH- Practice Exam

$13

Tax Incidence Nominal versus Economic Incidence *Tax burden determined by relative elasticity *More inelastic, more of the burden

Subsidy Incidence Nominal versus Economic Incidence *Subsidy benefit determined by relative elasticity *More inelastic, more benefit *In the diagram, demand is more inelastic, so the consumers’ price drops more than the producers’ price increases.

Externalities- simplified Negative MPC < MSC and MSC > MSB P is too low and Q is too high Over allocation of resources Per unit tax equal to MEC Positive MPB<MSB and MSB > MSC P is too low and Q is too low Under allocation of resources Per unit subsidy equal to MEB

Coase Theorum "if trade in an externality is possible and there are no transaction costs , bargaining will lead to an efficient outcome regardless of the initial allocation of property rights”

Types of Taxes *Based on % of income Progressive Proportional/Flat Regressive

Examples of Taxes *Based on % of income Progressive- Federal Income Tax Proportional/Flat- State Income Tax Regressive- Sales Tax

Income Tax Progressive Tax (Federal)

Income Tax Progressive Tax (Federal)

State Income Tax Proportional Tax/Flat Tax PA = 3.07%

Sales Tax- Regressive or Proportional? 6%

Sales and Excise Taxes are Regressive

Paying for Public Goods- Tax Philosophies Benefits Received Principle Closer to free market solution Example- Gas tax to fund highways Ability to Pay Principle Examples- Progressive Income Tax - School Property Tax

Income/Wealth Inequality Measures of the Distribution of Wealth/Income Graphical: Lorenz Curve Numeric: Gini Coefficient

Lorenz Curve (wealth OR income) Line of Equality

Lorenz Curve Line of Equality

Lorenz Curve Line of Equality

Gini Coefficient

Measuring Inequality Lorenz Curve Gini Coefficient Farther from 45 = greater inequality Closer = more even distribution Gini Coefficient 0 = complete equality 1 = complete inequality A/A+B

Wealth Gini

Income Gini

Redistribution of Wealth/Income Reducing Inequality Transfers (tax some and give to others) WIC TANF SNAP Unemployment Comp Obamacare Control Market Prices Minimum wage Rent control Taxes Progressive Income Tax – largest federal revenue source Estate “Death” Tax

Asymmetric Information Adverse Selection -Before Transaction Examples -Used Cars -Health Insurance -Loans -Infomercials *I was watching QVC Moral Hazard -After Transaction Examples -Health Insurance -Car Insurance -Loans -Helmet Requirements

Government Failure

Government Failure

Government Failure

Government Failure

Government Failure

Government Failure Government Failure- government intervention decreases efficiency, leads to poor allocation of resources, and diminishes economic welfare. Public Choice Theory economic self-interest motivates in the public sector as it does in the private sector people vote for the candidate who promises the greatest economic gain for them Rent Seeking $$ spent on lobbying for economic gain Attempts to increase income without any human capital or productivity gains Lack of Profit Motive Enforcement Costs Red Tape

Economic Rent- in other words Payment for/to any factor above the payment required by its owner

Sides

2 characteristics of a pure public good

2 characteristics of a pure private good

Types of good the market is least likely to provide

Problem caused by the non-excludability of public goods

Because millions can watch TV at the same time without inhibiting each others watching ability, cable television service is Non _______

The government should regulate pollution to the point where _____ = ____

If a competitive market in equilibrium has MSC > MSB

If a competitive market in equilibrium has MSB > MSC

Which type of externality results in an under allocation of resources?

When graphing a negative externality, the DWL falls to the _____ of the socially optimal point

Would a per unit tax move society closer or farther from the socially optimal quantity?

Would a lump sum subsidy move society closer or farther from the socially optimal quantity?

Quantify a government solution to this market failure. $30 $23 $20

Quantify a government solution to this market failure. $13 $100 $90 $75

When graphing a positive externality, the DWL falls to the _____ of the socially optimal point

The Federal income tax is a ___ tax

The sales tax is a ___ tax

If one person controls all income in a nation, the Gini coefficient is

The 45 degree line is also known as the line of

If the government increases transfers to low income households, what will happen to the Lorenz curve

If the government increases transfers to low income households, what will happen to the Gini coefficient?

I should sleep with a mouth guard, but I have zero deductible dental insurance.