Chapter 3: 1. Public and Private Goods 2. The Business Cycle (a little about unemployment too) 3. Positive and Negative Externalities

Private and Public Goods: What is the difference? A Private Good: An example of the Private Good is bread (or any food): there is a finite (limited) amount of it, and bread eaten by a given person cannot be consumed by another. there is a finite (limited) amount of it, and bread eaten by a given person cannot be consumed by another. 1.Excludability to one individual (in other words it can only be consumed by one person) 2.Depletability (it is has an end, it can be used up) two main features are... How about money? YES, it is Private

A Public Good: Some examples of the public goods are: 1.It does NOT have an end ( in other words, once it has been produced, everyone can benefit from it without diminishing other's enjoyment ) 2.Non-Excludable once it has been created, it is very difficult (almost impossible) to prevent access to the good. EVERYONE HAS ACCESS TO THE GOOD. two main features are:  national defense  our system of property rights  public fireworks lighthouses  lighthouses QUESTION: It is important to note that without _____________ there would be NO private or public goods supplied. To an economist the HOUSEHOLD is the _____ important Decision Maker in an economy. HOUSEHOLDS Private and Public Goods: What is the difference?  Earned Income Tax Credit (reduction in taxes to the working poor, so they pay less) MOST

Before we begin the Business Cycle: What is the unemployment rate? Unemployment rate NOT Simply means the percentage of people that are NOT employed. So…  To have a high unemployment rate MUST mean the economy is doing poorly (means there are many people unemployed)  To have a low unemployment rate MUST mean the economy is doing well(means there are few people unemployed)  To have a low unemployment rate MUST mean the economy is doing well (means there are few people unemployed)

US Unemployment History

Unemployment for Louisiana

WHY? 1.Simply, due to scarcity, there are NOT enough jobs for ALL the people in the USA. 2.Also, some people are just not motivated to work. Economists consider between ___ and ___ unemployment to be a healthy rate. This is a high unemployment rate The Business Cycle 0% unemployment can never be achieved. 4%5%

Unemployment and Poverty are not the same thing Just because the unemployment rate is high one year does not mean that the number of poor will increase. The unemployment rate includes a lot of unemployed people that are NOT poor. Such as: Individuals who have simply switched careers and are returning to school. College students who receive money from scholarships and parents Individuals who quit working due to a large financial gain (a investment that went well or won a lottery) However, if the unemployment rate does remain HIGH for a long period of time, then it is possible to see an INCREASE in the poverty rate. FYI QUESTION: FYI QUESTION: According to the latest Census Report, the leading cause of all poverty in the United States is: BIRTHS TO SINGLE MOTHERS Correction to the book’s information about poverty rates and unemployment.

BUSINESS CYCLE The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. five stages The five stages of the business cycle are : 1.Growth (expansion) 2.Peak (highest point of cycle, means that the unemployment rate is at its LOWEST level) -- Think of the “Roaring 20’s” 3.Recession (contraction - or slow down of the economy) 4.Trough (lowest point of cycle, means that the unemployment rate is at its HIGHEST level) – Think of the “Great Depression” 5.Recovery (productivity increases and the total products produced in a nation increase) Business Cycle

How does this cycle relate to unemployment rates?  A peak means that the economy is doing very well and the unemployment rate is at its LOWEST level  A trough means that the economy is doing poorly and the unemployment rate is at its HIGHEST level Remember the stages of the business cycle: Growth, Peak, Recession, Trough, Recovery, Growth

RECESSION:  Defined: A significant decline in economic activity spread across the economy The technical indicator of a recession is two consecutive quarters of NEGATIVE economic growth (or decline) as measured by a country's output of goods. The technical indicator of a recession is two consecutive quarters of NEGATIVE economic growth (or decline) as measured by a country's output of goods. It effects industrial production, employment, income, and wholesale-retail trade. It effects industrial production, employment, income, and wholesale-retail trade. Recession is a normal ( yet unpleasant ) part of the business cycle. Recession is a normal ( yet unpleasant ) part of the business cycle. A recession generally lasts from six to eighteen months. A recession generally lasts from six to eighteen months. What is a Recession? Business Cycle: What is a Recession?

The Business Cycle & Unemployment QUESTION:During what year did a recession occur? QUESTION: During what year did a recession occur? 1992 was the worse recessionary year since the 1980s

Why and How do we stabilize this business cycle? Why? We need to stabilize this cycle because … 1.The economy cannot take care of itself (regardless of what Adam Smith said) 2.A recession (if it lasts for a long period of time) can cause high unemployment and business failure. 3.It is possible for an economy to do TOO WELL  normally prices increase during an economic boom, which is not good for people on fixed income, such retire folks How? Through the use of monetary and fiscal policy

Fiscal Policy How to Stabilize the Business Cycle using: Fiscal Policy John Maynard Keynes Did not believe in “laissez faire” economics (laissez faire: no government regulation of the economy) Did not believe in “laissez faire” economics (laissez faire: no government regulation of the economy) Instead, Keynes stated that the government should use spending and taxation to stabilize the market. Instead, Keynes stated that the government should use spending and taxation to stabilize the market. He believed that “aggregate demand was the driving force in an economy and that government has a responsibility to fight economic slowdowns”. He believed that “aggregate demand was the driving force in an economy and that government has a responsibility to fight economic slowdowns”.  Basically, he believed that demand for products and services was the only factor keeping the economy together.  So if there was a recession and many people were out of a job, then the economy would fail. Therefore, it is the government’s job to help fuel the economy. Fiscal Policy: government’s use of taxation and spending to regulate the economy throughout the business cycle.  Believed in the use of FISCAL POLICY

How to Stabilize the Business Cycle using Fiscal Policy An Example of Fiscal Policy During an economic slowdown (trough) the government will DECREASE taxes and INCREASE spending During an economic boom (peak) the government will INCREASE taxes and DECREASE spending

How to Stabilize the Business Cycle using: Monetary Policy: government’s use of money supply and interest rates to regulate the economy throughout the business cycle. Monetary Policy Interest Rates usually fall in recessionary times to stimulate the economy by offering cheap rates at which to borrow money. Money Supply usually increases in recessionary times to stimulate the economy by supplying money to businesses and people. So, our government uses both fiscal and monetary policy to regulate the economy throughout the business cycle.

EXTERNALITIES OF PRODUCTION What are externalities?  An externality occurs in economics when a decision (or product) causes costs or benefits to any person OTHER than the person making the decision or buying the good.  In other words, the decision-maker ( buyer ) does not bear all of the costs or reap all of the gains from his action. OTHERS are effected too. These externalities cause either POSITIVE or NEGATIVE results

EXTERNALITIES OF PRODUCTION What are externalities? Examples of negative externalities include:  Pollution by a firm in the course of its production which causes nuisance or harm to others. (chicken house, pulp wood mill)  Toxic chemicals contained within TVs ( if the TV is not properly disposed of it will pollute the environment )  These decisions have a certain social cost. (society must bear these costs) QUESTION: What are two negative externalities of providing healthcare to the nation?  doctor’s insurance premiums are raised due to patient’s winning law suits  hospital costs increase as a result of litigation and false insurance claims

EXTERNALITIES OF PRODUCTION What are externalities? Examples of positive externalities include:  An individual planting an attractive garden in front of his house may benefit others living in the area.  My decision to come to school today and teach you ( I see it as positive, you might see it as negative )  These decisions have a certainsocial benefits.  These decisions have a certain social benefits.

Thinking Critically Although automobiles powered by natural gas are expensive, they create little pollution. Although automobiles powered by natural gas are expensive, they create little pollution. Why does the gov’t give tax deductions to businesses that use these trucks? Why does the gov’t give tax deductions to businesses that use these trucks? Use this “tax money” to expand their business and also TO REDUCE A NEGATIVE EXTERNALITY