Llad Phillips1 Introduction to Economics Distribution of Income Public Goods

Llad Phillips 2 Two Basic Perspectives in Economics Efficiency –competitive markets insure that consumers pay a price for goods and services equal to their marginal cost of production –On the frontier versus within production possibility frontier Equity –should goods and services go to those who can afford them? – Should one dollar = one vote?

Llad Phillips 3 SMC I SMC II Quantity MC,, ATC Optimal Size of the Firm: Constant Returns to Scale If market price is above long run marginal cost, the firm will make the same excess profit per unit of output in a large plant as in a small plant. The firm may prefer larger to smaller. As long as firms are making excess profits, other firms will enter the industry, increasing supply, and driving price down to LMC. Lecture 14 SATC I SATC II LATC, LMC pMpM

Llad Phillips 4 Inefficient use of Labor, Land and Capital Agriculture Manufacturing etc. (Non-Ag) Production Possibility Frontier: Real GDP Fig. 1.1 in text

Llad Phillips 5 Is an Efficient Economy the Same as a Decent Society? Is a meritocracy fair? Our society and American economists tend to focus more on efficiency

Llad Phillips 6 Income Inequality Across the World Lab 7, Ch. 23, Internet Exercises, World Bank Links

Llad Phillips 7 How Do Countries Like Sweden Attain Low Gini Coefficients,( More Equity)? Government taxes citizens and redistributes income

Llad Phillips 8 Lab 7, Ch. 23, Internet Exercises, “Taking a Look at the Level of Economic Development and Well-Being in Countries Around the World” Link to Handbook of International Economic Statistics

Llad Phillips 9 Income Inequality: Brazil Versus Hungary World Bank Development Education Program Beyond Economic Growth, Online Student Book

Llad Phillips 10 Lorenz Curves for Hungary and Brazil

Llad Phillips 11 Poverty Around the World Population living on less than $1 per day

Llad Phillips 12 World Distribution of People Living on Less Than $1 Per Day Beyond Economic Growth, Online Student Book

Llad Phillips 13 Poverty in the US US Government Definition of Poverty –Subsistence wage: $17603 in 2000 a non-farm family of four cost of inexpensive but nutritious food times 3 –assume food is 1/3 of budget Trends in Poverty Incidence of Poverty –elderly –children/families headed by single women –rural

Llad Phillips 14 Poverty in the United States Economic Issues Political Issues Social Issues –changing behaviors –marriage trends –divorce trends –births out of wedlock

Llad Phillips 15 Poverty Trends: Lab10: Children, Poverty, and Politics: US Census Bureau: Poverty in the United States: 2000

Llad Phillips 16 Poverty and Female Heads of Households Lab10: Children, Poverty, and Politics: US Census Bureau: Poverty in the United States: 2000

Llad Phillips 17 Poverty and Youth Lab 10: Children, Poverty, and Politics

Llad Phillips 18 Child Poverty Lab 10: Children, Poverty and Politics: “Child Poverty in the States ….”

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Llad Phillips 25 Summary-Vocabulary-Concepts input factor shares distribution of personal income distribution of family income frequency distribution of income cumulative distribution of income Lorenz curve Gini coefficient median family income part-time, part-year worker full-time, full-year worker within group variation in earnings ability differential between group variation in earnings education differential experience differential definition of poverty

Llad Phillips 26 Public Goods Domestic Tranquility: The protection of life, liberty and property (role for government) Safety –safe air –safe water –safe food –safe transportation: highwaymen & pirates –safe communications

Llad Phillips 27 Domestic Safety Control of Crime (control of pollution) Air travel: the history of skyjacking The incidence of robbery and burglary –the burden of the poor –economic notion of public goods

Llad Phillips 28 Social Control of Problems Pollution Crime

Llad Phillips 29 Propositions People would like zero pollution and zero crime Society can not achieve zero levels of these “bads” because of diminishing returns to abatement activities People are reluctant to give up consumption and pay more taxes for safety from pollution and crime

Llad Phillips 30 Crime Control or Pollution Abatement Offenses (Pollution) Arrests (Cleanup) Where does crime (pollution) come from? It is generated by the economic, social and political processes associated with growth. Supply of Offenses Diminishing returns principle

Llad Phillips 31 Expenditure on Enforcement (Pollution Abatement) Control Expenditure Cost in $ Arrests (Cleanup) Assume costs of control are proportional to the level of abatement activity.

Llad Phillips 32 Budget Constraint: GDP = Control Expenditures + Consumption Control Expenditures Consumption The opportunity cost of controlling crime or cleaning up pollution is less consumption, for a given level of GDP (scarcity principle).

Llad Phillips 33 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution)

Llad Phillips 34 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution) Abatement Cost Arrests

Llad Phillips 35 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution) Abatement Cost Supply of Offenses (pollution) Arrests

Llad Phillips 36 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution) Abatement Cost Arrests

Llad Phillips 37 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution) Abatement Cost Arrests

Llad Phillips 38 Synthesis: the Crime (pollution)Problem-Consumption Tradeoff Expenditure on Control Consumption Budget Constraint Offenses (pollution) Abatement Cost Arrests

Llad Phillips 39 Crime (pollution) - Consumption Possibility Frontier Consumption: good Offenses (pollution): bad The first step of the paradigm: the options for choice

Llad Phillips 40 Reality Check About Bads People would like zero bads: not possible

Llad Phillips 41 Crime (pollution) - Consumption Possibility Frontier Consumption: good Offenses (pollution): bad The first step of the paradigm: the options for choice Minimum possible

Llad Phillips 42 Reality Check About Bads People would like zero bads: not possible People don’t want to bear the costs of controlling bads: creates a problem for politicians –people demand less crime and less pollution, but do not want higher taxes –opportunity cost of less crime and less pollution gets higher and higher

Llad Phillips 43 Crime (pollution) - Consumption Possibility Frontier Consumption: good Offenses (pollution): bad The first step of the paradigm: the options for choice Opportunity cost of less crime

Llad Phillips 44 Community Values Confront Reality: Crime (pollution) - Consumption Possibility Frontier Consumption: good Offenses (pollution): bad The second step of the paradigm: pricing the options Community preferences Community wish list Whose community (social) values? The pharoah’s, the king’s, the peoples’?

Llad Phillips 45 Community Values Confront Reality: Crime (pollution) - Consumption Possibility Frontier Consumption: good Offenses (pollution): bad The third step of the paradigm: choosing the best option Community preferences Feasible options Best option given community preferences

Llad Phillips 46 Pollution Control Expenditures as a % of GDP Lab 7, Ch. 23, Internet Exercises, “Taking a Look at …”,Handbook of International Economic Statistics”

Llad Phillips 47 Growth Versus the Environment Ironically, while much pollution is associated with growth, it is the developed countries that can afford to clean up their environment, as the previous slide shows. The developing countries create a fair amount of pollution, but have so many pressing needs that cleaning up pollution tends to get a lower priority

Llad Phillips 48 Brief History of Skyjacking Skyjackings Abroad: many motivated by terrorism and politics, especially in the 60’s, 70’s and 80’s. Skyjackings in the US: Only one was politically motivated Yet US Skyjackings appear to be linked to foreign skyjackings Efforts to deter skyjackings by screening passengers helps but does not solve the problem (US Civil Aviation Act of 1973)

Llad Phillips 49 Skyjackings The first skyjacking was a Peruvian carrier in February 1931 The first skyjacking of a US carrier was a National Airlines flight destined for Key West Florida on May 1, 1961

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Llad Phillips 51 The Legend of D. B. Cooper

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Llad Phillips 53 US Response to Domestic Skyjackings Armed Federal Marshals on Flights –mostly on flights on the Eastern seaboard corridor Congress Passes the US Civil Aviation Security Program in 1973

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Llad Phillips 60 Terrorism Foreign Skyjackings US Skyjackings Model of US Skyjackings and Bomb Threats Bomb Threats to US Aircraft Inspection 2 Year Lag

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Llad Phillips 63 Recent History of US Terrorism Prior to September 11, 2001 Bombings –World Trade Center, New York –Murtaugh Federal Building, Oklahoma City –Black Churches

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Llad Phillips 65 Office of the Coordinator for Counter-Terrorism Patterns of Global Terrorism

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Llad Phillips 71 The Burden of Crime by Income Group Burden is on the poor

Victimization Rates by Income Class Source: Report to the Nation on Crime and Justice, Second edition

Robbery Burglary equality

Llad Phillips 74 Why is Robbery More Unequal Than Burglary? Protection from burglary may be more of a private good –buy locks, dogs, security alarms and surveilance services Protection from robbery may be more of a public good –safe streets

Public Goods and Private Goods Private Goods –consumption uses them up what you eat is not available to nourish others Public Goods –consumption does not use them up national defense safe streets educated citizenry

Public  Goods Private Goods Optimal Mix Too Few Public Goods Slope of the Production PossibilityFrontier: Marginal Cost of Public Goods ÷ Marginal Cost of Private Goods How Much Government Should There Be? What is the right mix of public goods and private goods?

Llad Phillips 77 Central Government Expenditure as a % of GDP,

Llad Phillips 78 Increase in Private Sector Output between 1990 and 1995, for Countries with a History of Socialism The Triumph of Capitalism