Sectors of the US Economy

Recall: “Private Sector” = Households + Businesses “Public Sector” = Government

I.Households 3 ways to use income: 1. Taxes (after taxes, the remaining income is called “disposable income” 2. Spending/Consumption 3. Savings (This will be very important later when we do National Income Accounting.)

II.Businesses/Firms Forms of Business Organization Sole ProprietorshipPartnershipCorporation # of Owners Advantages Disadvantages Also with corporations: some legal costs to set up, but these are usually very small.

III.Government Still fulfills important functions in a free market, some of which make sure the free market works: 1. Maintain competition: prevent monopolies, or regulate “natural monopolies” 2. Redistribute income (how much is controversial) a) Transfer payments: Primary “entitlement” programs: Social security, Medicaid, welfare, Medicare b) Note that there are costs and benefits to ALL gov’t action

Gov’t (continued) 3. Re-allocate resources to correct market failure Externalites/spillovers: some market transactions involve a cost or benefit (when the product is produced, bought/sold, or used) to some 3 rd party not involved in the transaction. Negative externalities: gov’t can legislate or tax Positive externalities: gov’t can provide or subsidize

Gov’t (continued) 4. Provide public goods (nat’l defense, lighthouses, roads, etc.) 5. Ensure stability and growth (low unemp, low inflation, steady growth); can be controversial