1. Market Failures

2. Review
Identify the three of the four market failures we have learned in this unit.
Explain why are public goods a market failure.
Explain why are externalities a market failure.
Explain why are monopolies a market failure.
By yourself, draw a positive externality.
By yourself, draw a negative externality.
Use graph to explain the remedy for positive externalities.
Use graph to explain the remedy for negative externalities.
Name 4 different marsupials.

4. Market Failure #4 Unfair Distribution of Wealth
Net Worth: Nothing
Net Worth:
over $2.3 billion

5. What percent of American’s are living in poverty?
Why is income distribution a market failure?

6. Income Inequality
In 2013, the average American family made $64,030.
Everyone is obviously rich.
What’s wrong with using the average?
Averages reveal absolutely nothing about how income is distributed.
How does the government measure distribution of income?

7. Measuring Income Distribution
THE LORENZ CURVE
Measuring Income Distribution
Review the process:
The government divides all income earning families into five equal groups (quintiles) from poorest to richest.
Each groups represents 20% of the population.
If there was perfect equality then
20% families should earn 20% income,
40% should earn 40% (and so on).
The government compares how far the actual distribution is from perfect distribution then attempts to redistribute money fairly.

8. Measuring Income Distribution
Summary:
Group #1 (Poorest 20%)
Total of $5 (5% of total income)
Group #2
Total of $10 (10% of total income)
Group #3
Total of $15 (15% of total income)
Group #4
Total of $25 (25% of total income)
Group #5 (Richest 20%)
Total of $45 (45% of total income)

9. The size of the banana shows
The Lorenz Curve
100 80 60 40 20
Lorenz Curve
(actual distribution)
After Distribution
The size of the banana shows
the degree of
income inequality. 55 30 15 5
Percent of Income
Perfect Equality
The banana gets smaller when the government re-distributes income.
Percent of Population

10. Income Quintile
U.K.
Columbia
China
20%
7.64%
3.60%
6.02%
40%
12.61
8.79
10.70
60%
15.96
12.89
15.81
80%
22.95
20.37
25.82
100%
40.84
54.35
41.65

11. A B Gini Coefficient / Index / Ratio A B
0 (Complete Equality) ~ 1 (Complete Inequality)
100 80 60 40 20
Percent of Population
Percent of Income
Perfect Equality
Lorenz Curve
(actual distribution) A B A B
0 (Complete Equality)  Everyone has the same income
1 (Complete Inequality)  One person has all the income, while everyone else has no income)

12. How is income distributed in the US
How is income distributed in the US? Historical Income Table- Income Equality in USA
The Gini Coefficient is a number between 0 and 1 that is a measure of Inequality.

13. 2014 World Gini Index
It is a world problem

14. How do we fix this?

15. Where does the government get the money for welfare?
WELFARE provides a safety net for citizens (retirement, unemployment, workers comp, health, etc.) BUT, what are some possible downsides?
Where does the government get the money for welfare?

17. Why does the government tax?
What are Taxes?
Taxes – mandatory payments made to the government to cover costs of governing.
Why does the government tax?
Two purposes:
Finance government operations.
Public goods-highways, national defense, wages
Fund Programs- welfare, social security
2. Influence economic behavior of firms and individuals.
Ex: Excise taxes on tobacco raises tax revenue and discourages the use of cigarettes.

18. Three Types of Taxes
1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people).
2. Proportional Taxes (flat rate) –takes the same percent of income from all income groups.
3. Regressive Taxes –takes a larger percent of income from low income groups (takes more from poor people).

19. Three Types of Taxes
1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people).
Ex: Current Federal Income Tax system.
2. Proportional Taxes (flat rate) –takes the same percent of income from all income groups.
Ex: 20% flat income tax on all income groups.
3. Regressive Taxes –takes a larger percent of income from low income groups (takes more from poor people).
Ex: Sales tax; any consumption tax.

20. Progressive / Proportional / Regressive
Three Types of Taxes
Progressive / Proportional / Regressive
(THINK % of Income)
Regressive
Toll road tax ($1 per day)
State income tax where richer citizens pay higher %
$.45 tax on cigarettes
Medicare tax of 1% of every dollar earned
Government tax 25 cents every dollar of income
8.25% California sales tax
Progressive
Regressive
Regressive
Progressive
Proportional
Proportional
Proportional
Regressive

21. Federal Income Tax Debate
Equal Tax of $350 per week
Income
Amount of Tax %
Amount to live on
$200
$350
175%
-$150 (crime?)
100% $0
$500
70%
$150
$1,000
35%
$650
$5,000 7%
$4,650
(Regressive Tax)
Tax tax of 20% per week
Income
Amount of Tax
Amount to live on
$200
$40
$160
$350
$70
$280
$500
$100
$400
$1,000
$800
$5,000
$4,000
(Proportional Tax)

22. Federal Income Tax Debate This is our current system.
Is it fair?
The “Progressive tax system” is the most effective way to fight this market failure.

23. The Laffer Curve Shows relationship between tax rate and tax revenue.
LAST micro graph to learn!!!!
The Laffer Curve
Shows relationship between tax rate and tax revenue.
What would happen if the highest tax bracket was 75%? 25

24. THINK ROBIN HOOD!!!!!! What was his group’s name? Merry Men
What did they do?
Laugh a lot…they were “Laffers.”
What was his weapon of choice?
Bow and Arrow
What did Robin Hood do?
Steal from the rich and give to the poor.
What would happen to the amount of travelers through Sherwood forest if he took 95% instead of 39% of their money?
What would happen to the total amount of money he collects? 26

25. If the government increase taxes rates, tax revenue will increase
The Laffer Curve
% Tax Rate
If the government increase taxes rates, tax revenue will increase
If the tax rate becomes too high, tax revenue will fall since workers have no incentive to work harder
Tax Revenue 27

26. YOU ARE DONE WITH MICRO!!!!

27. All you have to do now is to PASS the Final

28. Practice FRQs

29. 2010 Practice FRQ 31

30. 2005, #2

31. 2003, #1

32. Review Activity: Password

33. Sit down when you are done
Public Good
Tax
Positive Externality
Free Rider
Marginal Social Cost
Round 1

34. Sit down when you are done
Negative Externality
Nonexclusion
Market Failure
Invisible Hand
Common Pool Problem
Round 2