2. 4 - 1 Unit 4 Market Failure and the Role of the Government Honors Economics

3. 4 - 2 ADAM SMITH Wealth is Material Goods, not Gold -The Wealth of Nations 1776

4. 4 - 3 FREEDOM OF CHOICE MARKETS NO GOVERNMENT INTERFERENCE COMPETITION Smith’s Free Market PRIVATE PROPERTY SELF-INTEREST

5. 4 - 4 Other Characteristics Specialization and Trade Capital Investment Use of Money Smith’s Free Market

6. 4 - 5 The Case for the Market System Efficiency Growth Freedom THE INVISIBLE HAND

7. 4 - 6 Karl Marx Market Failures

8. 4 - 7 The world praises the individual who makes the most people happy. -Das Kapital 1867 Karl Marx

9. 4 - 8 The Situation in 1868 Workers - including women and children as young as 4 - spent 14 hours a day, 6 days a week on the job factory work was unsanitary and unsafe with no guarantee of compensation for injury or illness 80% of factory workers lived in poverty huddled in ghettos and tenements business cycles made workers the victims of either high inflation or high unemployment the richest 1% owned over 90% of total wealth

10. 4 - 9 Wealth is Utility, not Material Goods. -Das Kapital 1867 Karl Marx

11. 4 - 10 All wealth is a direct result of combining Labor with the other Tools of Production LABOR THEORY OF VALUE The concept of Private Property has separated the worker from access to the other Means of Production ALIENATION Scientific SocialismEXPLOITATION Private Ownership allows the Capitalist to seize the Surplus Labor Value of the worker as Profit by paying Subsistence Wages

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13. 4 - 12 Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $ 331,000,000.00 The daily cost for running Walt Disney World is about $ 259,000 a day; that’s $ 94,534,000 a year.

14. 4 - 13 Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $ 331,000,000.00 The daily cost for running Walt Disney World is about $ 259,000 a day; that’s $ 94,534,000 a year. In the final year before he was fired as CEO of the Disney Corporation, Michael Eisner was given a bonus of $202,000,000.

15. 4 - 14 QUESTION:

16. 4 - 15 If Michael Eisner didn’t show up for work this Saturday, could you still go to Disney World?

17. 4 - 16 If all the employees didn’t show up for work this Saturday, could you still go to Disney World ?

18. 4 - 17 BUSINESS CYCLES IMPERFECT COMPETITION PUBLIC GOODS ASYMMETRIC INFORMATION Marx’s Market Failures INEQUITY EXTERNALITIES

19. 4 - 18 Marx’s Market Failures BUSINESS CYCLES SEASONAL CYCLES 36 MONTH CYCLES 10 YEAR CYCLES 50 YEAR CYCLES STRUCTURAL CHANGES IN TECHNOLOGY

20. 4 - 19 Marx’s Theory of the Business Cycle Level of Real Output Time Peak Recession Expansion Trough Growth Trend  Twin Problems of the Business Cycle Unemployment Inflation

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24. 4 - 23 Three Facts About Economic Fluctuations As output falls, unemployment rises. Unemployment rate, percent of labor force

25. 4 - 24 An Interesting Aside About Economic Fluctuations Some Economists believe Technological Cycles have become shorter.

26. 4 - 25 Marx’s Market Failures IMPERFECT COMPETITION

27. 4 - 26 Marx’s Market Failures ASYMETRIC INFORMATION

28. 4 - 27 Marx’s Market Failures EXTERNALITIES

29. 4 - 28 Fig. 26.1 top

30. 4 - 29 Marx’s Market Failures INEQUITY

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32. 4 - 31 2007 US Family Income Shares before Taxes and Transfers: –Lowest 5 th = 1% –Second 5 th = 7% –Middle 5 th = 14% –Second highest 5 th = 23% –Highest 5 th = 55%

33. 4 - 32 2007 US Family Income Shares after Taxes and Transfers: –Lowest 5 th = 5% –Second 5 th = 10% –Middle 5 th = 16% –Second highest 5 th = 23% –Highest 5 th = 46%

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36. 4 - 35 BUSINESS CYCLES IMPERFECT COMPETITION PUBLIC GOODS ASYMMETRIC INFORMATION Marx’s Market Failures INEQUITY EXTERNALITIES

37. 4 - 36 Alternatives Considered #1 REVOLUTION

38. 4 - 37 Alternatives Considered #2 Unions

39. 4 - 38 Alternatives Considered #3 government intervention

40. 4 - 39 SOCIALISM GOVERNMENT BY DIRECT POPULAR VOTE PUBLIC OWNERSHIP OF THE MEANS OF PRODUCTION –COMMUNICATION –TRANSPORTATION –FINANCE –EDUCATION –HEALTH CARE PROGRESSIVE INCOME TAX REDISTRIBUTION OF INCOME CREATION OF A SOCIAL WELFARE SAFETY NET ELIMINATION OF DISCRIMINATION