The Mixed Economy: Private & Public Sectors Chapter 5

Chapter Objectives  Acquire basic knowledge regarding the household & business components of the private sector economy  Acquire basic knowledge of the public sector in the U.S. Economy

National Income Distribution  Wages & Salaries (70%)  Proprietor (Self Employed) Income (9%)  Capitalist Income (Corporations profits + rent + interest (12%)  Largest component of capitalist income is the profits of corporations  The sum total of all these is defined as “National Income” (NI) and will be used in calculating GDP

Personal Income (PI)  3 different categories  Taxes  Savings  Spending (Consumption) By far the largest and most encouraged for the last half century  Our consumption drives the global economy, and perhaps, right off the cliff

Consumer Spending  Divided into three categories  Durable goods – More than 3 years  Non-durable goods – Less than 3 years  Services

The Business Population  Plant – Physical establishment where production or distribution takes place  Firm – Business organization that owns the plants  Industry – Group of related firms  Multi-plant Firms – Includes those firms that have been integrated both horizontally & vertically

Types of Businesses  Sole Proprietorship – Individually owned, easy to set up, profits undivided, quick decision making / Limited Resources, Unlimited Liability  General Partnership – Two or more operate under partner agreement, more specialized, more resources / Decisions and profits are both divided, still unlimited liability

Types of Businesses Cont’d  Corporations – Legal entity distinct from the individual owners, Board of Directors & Shareholders, Usually have access to greater amounts of capital, limited liability / Bureaucratic in nature, Conflicting Interests (Principle Agent Problem)  Hybrid Structures – Limited Liability Company (LLC), S-Corps

Public Sector – Government Role  Enforces laws, property rights, contracts, acts as a referee in matters of dispute and regulates behavior and imposes penalties for wrong doing  Helps to allocate resources, provide markets, ensures product quality & safety  Appropriate regulation is at the level where cost = benefit

Government & Competition  Competition forces producers to respect consumer sovereignty  Monopoly power allows for producers to supplant the consumer and impose its own power  Natural monopolies occur when technological or economic realities make a monopoly more efficient – Gov’t will then regulate price & service

Actions in Regards to Monopolies  Sherman Anti-Trust 1890  Clayton Act of 1913  More recently....  Justice Department in the 1990s targeted Microsoft  NBA, NFL, & MLB  Clear Channel in the world of radio

Redistribution of Income  Taxes (Wealthier pay higher percentage)  Transfer payments (Medicare, SS, Welfare, Unemployment Insurance)  Price support program such as subsidies for Farmers

Spillover and Negative Externalities  Results that occur from industrialization, both positive & negative, may require government involvement to ensure public safety or stop corrupt business practices  E-Waste, Pollution, etc.  n n n

Resource Allocation  Market failures occur when resources are allocated improperly  The Government must assure that spillover cost is absorbed by those causing it.  Ex – BP Oil Spill

Provider of Public Goods  Certain goods that cannot be divided (their use cannot be individualized) and therefore become public goods.  National Defense, Public Safety  Not enough people would demand these services so the Government provides and then pays through tax revenues

Exclusion Principle  The idea that a buyer will be excluded from the benefits of product that he does not purchase.  Applies to private goods, not however to public or quasi-public goods  Those who benefit from goods and services they do not pay for are labeled “free riders.”

Promoting Stability  Responsibility of the Federal Reserve  Policy is to tax and save if inflation threatens, lower taxes and spend when economy is struggling

Government Finance  Government purchases directly use resources to produce goods and services that are measured when calculating GDP that are measured when calculating GDP Transfer payments are excluded Transfer payments are excluded Since 1960, transfer payments have drastically increased Since 1960, transfer payments have drastically increased

Federal Finance Where does it get spent? Where does it get spent?  National Defense  Public Health  Interest on National Debt  Income Security

Federal Finance Where do we get the money? Where do we get the money? Personal Income Tax Personal Income Tax This is a progressive tax as it accelerates with higher incomes This is a progressive tax as it accelerates with higher incomes

Others Sources of Revenue  Payroll Tax – SS contributions, etc.  Corporate Tax  Excise Tax – Tax on a specific good  State & Local Governments obtain revenue through sales tax & property tax  Money is used for education and public welfare