Market+Failure+and+the+Role+of+Government

Olivia, Georges, Ipa, Mateo, and Amy I.Private and Public Good II. Role of Government in Reallocation of Resources III. Marginal Social Benefit and Marginal Social Cost IV. Progressive, Regressive, Proportional Taxes V. Tax Incidence and Deadweight (Efficiency Loss) VI. Income Distribution - Lorenz Curve

I.Private and Public Good- Olivia KEY TERMS: Rivalry- one person buys and consumes a product, it is not available for another person to buy and consume Excludability- sellers can keep people who do not pay for a product from obtaining its benfits Public Good- characterized by nonrivalry and non excludability (i.e. national defense, street lights) Private Good- characterized by rivalry and excludability (bottled water) Free rider problem- once a producer has provided a public good, everyone, even nonpayers, can benefit

The socially optimal amount of public good is the amount at which: A)MRP=MC B)MC=MB C) TR=ATC D) There is no socially optimal amount

II. Role of Government in Reallocation of Resources- Olivia KEY TERMS: Negative Externalities- when producers shift some of their costs on the community (pollution) There is an overallocation of negative externalities. Positive Externalities- when producers shift some of their benefits onto the community (vaccines). There is an underallocation of positive externalities. Coarse Theorem= government is not needed to remedy external costs or benefits where property ownership is defined, the number of people involved is small, and bargaining costs are negligible. Tragedy of the commons-no incentive to incur internal costs associated with negative externalities cap-and-trade- pollution-control agency determines the amount of pollutants that firms can discharge -Amy (below) Transfer payments- A good or service from the government given to a household or firm. The recipients make no current contribution to domestic output in return for them (ex: social security and unemployment compensation) Government purchases- Products purchased that directly absorb resources and are a part of domestic output

GOVERNMENT IN THE CIRCULAR FLOW DIAGRAM (Amy)

How can the government intervene in a negative externality case? A: Direct controls: legislation like The Clean Air Act B: Specific Taxes: excise taxes on CFCs C: Subsidies and Government Provision: payments to the buyer and the producer. OR government can produce such positive goods as vaccines. D: All of the above

The demand curve for a public good is: A) upsloping because of the law of diminishing returns B) elastic C) inelastic D) downsloping because of the law of diminishing marginal utility

[] [] These are two articles are good explanations of the oil spill in the Gulf that happened last week and how it will effect our country, its workers, and our economy. This spill is costing the country millions in resources, endangering marine life, destroying the shrimping and boating occupations, thus it is a negative externality.

[|What has So Far Prevented an Economic Depression?] (Amy) This is an article that has four excellent graphs depicting the governments role in preventing this most recent recession from turning into a depression.

III. Marginal Social Benefit and Marginal Social Cost The Cost-Benefit analysis is a method the government uses to decide whether resources should be used or not for a certain project. The Marginal Cost = Marginal Benefit Rule helps make this decision easier. 3 scenarios: 1) MB is greater than MC; then there is an underallocation of a public good 2) MC is greater than MB; then there is an overallocation of a public good 3) MC=MB, then there is an optimal allocation of public goods

IV. Progressive, Regressive, Proportional Taxes

Key Terms: Ability-to-pay principle- the taxes for the support of public goods should be tied to the incomes and wealth of people or their ability to pay Benefits-Received Principle- those people who benefit most from public goods should pay for them Progressive Tax- increases as income increases Regressive Tax- decreases as income increases Proportional Tax- is equal for each income bracket

Questions: The ability-to-pay principle is consistent with: A) A Regressive Tax system B) Tax incidence C) A pay-roll Tax D) A Progressive Tax system

Which Tends to be a Progressive Tax: A) Sales tax B) Property Tax C) Income Tax D) Ice-Cream Tax

REal-World Example http://www.nytimes.com/2010/05/02/business/02backpage.html?src=busln

 V. Tax incidence and Deadweight Key Terms: Tax Incidence- the effect  of a particular  t  ax on the distribution of economic welfare Efficiency loss of a tax- the loss in efficiency that occurs because there is a reduction in output, despite the fact that the marginal benefits of the output are greater than the marginal cost.

Deadweight (Amy) 1. The market is at equilibrium 2. The government imposes a tax (supply is shifted left) 3. The market now experiences a deadweight loss while the government gains revenue from the taxes

Questions: If the government places a property tax on a business who is most likely to pay for that tax: A) The Consumer of the product B) The Business C) The Government D) The people who enjoy the aroma that is emitted by the business

In a purely competitive market the portion of an excise tax borne by a consumer is: A) The total tax B) Equal to the amount borne by the producer C) The amount the product rises D) None of the tax

Example of Tax incidence: http://www.investorschronicle.co.uk/MarketsAndSectors/Markets/article/20100413/ee1a025e-46e7-11df-88e6-00144f2af8e8/Shareholders-1-workers-0.jsp

VI. Income Distribution- Lorenz Curve

Gini Ratio: Area between the Lorenz Curve and the Perfect Equality Line is (A). Area between the Lorenzo Curve and the Line of perfect inequality is (B). So the Gini Ratio = (A) / (A+B) To better illustrate: *[]
 * [|http://www.knowledgerush.com/wiki_image/b/bd/Lorenz-curve1.png]

This formula is used to gauge the income distribution in a country. Any number closer to 0 than to 1 will indicate an economy with an income distribution closer to the perfect equality line. The closer the Gini Coefficient is to 1, the closer to the perfect inequality line.

[|Paul Krugman on the Future of the Middle Class and Income Inequality] []

Discrimination- involves giving people different or inferior treatment in employment or living situations, based on some unrelated factor (A factor of inequality)


 * 1) Which of the following is NOT true:
 * 2) The argument for equality is that it leads to maximum consumer satisfaction
 * 3) Inequality can never help the economy
 * 4) In the US there’s an equality-efficiency trade off

b. Charity Donations c. Noncash transfers d. The Lottery
 * 1) Which of the following helps the most with the reduction of income inequality?
 * 2) a. Taxation