1. Market Failure and Government

3. The Role of Government and Market Failure

4. Public v. Private Goods
Excludability- Can producer keep benefits from those who do not pay?
Excludable
Non-Excludable
Rivalry- Does use by one reduce usefulness to others?
Rival
Nonrival

5. Public v. Private Goods Pure Private Pure Public Excludable and Rival
Example: Chia Pets
Pure Public
Nonexcludable and Nonrival
Example: National Defense
Government generally must provide
Free Rider Problem
Solutions: taxes versus donations

6. Free Rider Problem
People get benefit from good/service without paying for it.
Market will underprovide
Solution
Government provides and taxes
Market provides and seeks donations

7. Free Rider

8. Free Rider Solutions Government provides public goods using tax dollars Public shaming?

9. Public v. Private Goods Toll Goods Common-pool Resources
Excludable and nonrival
Example: Cable TV, Toll Road (often natural monopolies)
Common-pool Resources
Nonexcludable and rival
Example: fish in the public waters, congested roads
Government often regulates
Quotas, licensing fees

11. True or False (according to economists)
The government should mandate that all cars produce zero emissions by 2020.

12. True or False (according to economists)
The government should mandate that cars meet efficiency standards such that the marginal social cost of reducing emissions is equal to the marginal social benefit.

13. Externalities
Unintended consequences of production or consumption that hurt (negative) or help (positive) an uninvolved third party
*Someone other than the producers and consumers

14. Externalities Negative Externality: Positive Externality:
Marginal Social Cost > Marginal Social Benefit
Positive Externality:
Marginal Social Benefit > Marginal Social Cost
*Socially Optimal:
Marginal Social Benefit = Marginal Social Cost
*Requires government intervention when externalities exist

15. MSB = MSC

18. Per Unit Tax = to Marg. External Cost will eliminate DWL

19. Per Unit Subsidy = Marg. External Benefit will eliminate DWL

20. Schedule M- Externalities and Tax Intro T- Taxes and Wealth Inequality
W- Other Market Failures and Gov’t Failures
TH- QUIZ
Friday- On Your Back Graph Review
T and W- Bull’s eye Physical Challenge
TH- Practice Exam

21. $13

25. Tax Incidence Nominal versus Economic Incidence
*Tax burden determined by relative elasticity
*More inelastic, more of the burden

26. Subsidy Incidence Nominal versus Economic Incidence
*Subsidy benefit determined by relative elasticity
*More inelastic, more benefit
*In the diagram, demand is more inelastic, so the consumers’ price drops more than the producers’ price increases.

27. Externalities- simplified
Negative
MPC < MSC and MSC > MSB
P is too low and Q is too high
Over allocation of resources
Per unit tax equal to MEC
Positive
MPB<MSB and MSB > MSC
P is too low and Q is too low
Under allocation of resources
Per unit subsidy equal to MEB

28. Coase Theorum
"if trade in an externality is possible and there are no transaction costs , bargaining will lead to an efficient outcome regardless of the initial allocation of property rights”

29. Types of Taxes
*Based on % of income Progressive Proportional/Flat Regressive

30. Examples of Taxes
*Based on % of income Progressive- Federal Income Tax Proportional/Flat- State Income Tax Regressive- Sales Tax

32. Income Tax
Progressive Tax (Federal)

33. Income Tax
Progressive Tax (Federal)

34. State Income Tax
Proportional Tax/Flat Tax
PA = 3.07%

35. Sales Tax- Regressive or Proportional?6%

36. Sales and Excise Taxes are Regressive

37. Paying for Public Goods- Tax Philosophies
Benefits Received Principle
Closer to free market solution
Example- Gas tax to fund highways
Ability to Pay Principle
Examples- Progressive Income Tax
- School Property Tax

38. Income/Wealth Inequality
Measures of the Distribution of Wealth/Income
Graphical: Lorenz Curve
Numeric: Gini Coefficient

39. Lorenz Curve (wealth OR income)
Line of Equality

40. Lorenz Curve
Line of Equality

41. Lorenz Curve
Line of Equality

42. Gini Coefficient

43. Measuring Inequality Lorenz Curve Gini Coefficient
Farther from 45 = greater inequality
Closer = more even distribution
Gini Coefficient
0 = complete equality
1 = complete inequality
A/A+B

44. Wealth Gini

45. Income Gini

46. Redistribution of Wealth/Income Reducing Inequality
Transfers (tax some and give to others)
WIC
TANF
SNAP
Unemployment Comp
Obamacare
Control Market Prices
Minimum wage
Rent control
Taxes
Progressive Income Tax – largest federal revenue source
Estate “Death” Tax

47. Asymmetric Information
Adverse Selection -Before Transaction Examples -Used Cars -Health Insurance -Loans -Infomercials *I was watching QVC
Moral Hazard -After Transaction Examples -Health Insurance -Car Insurance -Loans -Helmet Requirements

48. Government Failure

49. Government Failure

50. Government Failure

51. Government Failure

52. Government Failure

53. Government Failure
Government Failure- government intervention decreases efficiency, leads to poor allocation of resources, and diminishes economic welfare.
Public Choice Theory
economic self-interest motivates in the public sector as it does in the private sector
people vote for the candidate who promises the greatest economic gain for them
Rent Seeking
$$ spent on lobbying for economic gain
Attempts to increase income without any human capital or productivity gains
Lack of Profit Motive
Enforcement Costs
Red Tape

54. Economic Rent- in other words
Payment for/to any factor above the payment required by its owner

55. Sides

56. 2 characteristics of a pure public good

57. 2 characteristics of a pure private good

58. Types of good the market is least likely to provide

59. Problem caused by the non-excludability of public goods

60. Because millions can watch TV at the same time without inhibiting each others watching ability, cable television service is
Non _______

61. The government should regulate pollution to the point where _____ = ____

62. If a competitive market in equilibrium has MSC > MSB

63. If a competitive market in equilibrium has MSB > MSC

64. Which type of externality results in an under allocation of resources?

65. When graphing a negative externality, the DWL falls to the _____ of the socially optimal point

68. Would a per unit tax move society closer or farther from the socially optimal quantity?

69. Would a lump sum subsidy move society closer or farther from the socially optimal quantity?

70. Quantify a government solution to this market failure.
$30
$23
$20

71. Quantify a government solution to this market failure.
$13
$100
$90
$75

72. When graphing a positive externality, the DWL falls to the _____ of the socially optimal point

74. The Federal income tax is a ___ tax

75. The sales tax is a ___ tax

76. If one person controls all income in a nation, the Gini coefficient is

77. The 45 degree line is also known as the line of

78. If the government increases transfers to low income households, what will happen to the Lorenz curve

79. If the government increases transfers to low income households, what will happen to the Gini coefficient?

80. I should sleep with a mouth guard, but I have zero deductible dental insurance.