The U.S. Economy: Private and Public Sectors Chapter 5

Households as Income Receivers The Functional Distribution of Income

Households as Income Receivers The Personal Distribution of Income

Households as Spenders Personal Taxes – U.S. Households pay an average 13% of income in taxes. Personal Saving – U.S. Households save an average of 3% of their income.

Households as Spenders Personal Consumption Expenditures – The remaining 84% of household income is spent on durable and non-durable goods, and services.

The Business Population A plant is a physical establishment – a factory, farm, mine, store, or warehouse. A firm is a business organization that owns and operates plants. An industry is a group of firms that produce the same, or similar, products.

Sole Proprietorships AdvantagesDisadvantages Easy to set up and organizeLimited Capital Little complex paper work and legal expense Proprietor must carry out all management functions Self-employment and freedom of actionUnlimited Liability – personal assets are risked. Strong incentive to manage business effectively due to personal liability

Partnership AdvantagesDisadvantages Easy to organizeDivided Authority/Potential Conflicts Not much complex paper work or legal expense Finances are better than sole proprietorship, but are still limited Financial resources greater than sole proprietorship Unlimited Liability Limited Life

Corporation AdvantagesDisadvantages Ease of Attaining Capital (Stocks and Bonds) Double Taxation Limited LiabilityThe Principle-Agent Problem Unlimited Life

The Public Sector: Government’s Role Providing the Legal Structure Maintaining Competition – - Monopoly Redistributing Income – - Transfer Payments – - Market Intervention – - Taxation

The Public Sector: Government’s Role Reallocating Resources and Market Failure Spillovers or Externalities – - Spillover Costs – - legislation – - specific taxes – - Spillover Benefits – - subsidize consumers – - subsidize suppliers – - provide goods via government Public Goods and Services – - Free-rider problem

The Public Sector: Government’s Role Quasi-Public Goods The Reallocation Process Promoting Stability – - Unemployment – - Inflation Government’s Role: A Qualification

The Circular Flow Revisited Government Resource Market Households Product Market Businesses

Federal Finance

State and Local Finance State Finances Local Finances – - Property Taxes