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Understanding U.S. Economy: Private and Public Sectors

Explore the functional distribution of income in the private sector and the role of the government in the public sector of the U.S. economy. Learn about market interventions, market failures, and the redistribution of income.

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Understanding U.S. Economy: Private and Public Sectors

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  1. ECON 201 Chapter 4 The U. S. Economy: Private & Public Sectors

  2. Functional distribution of income National Income Received (Percent) 0 10 20 30 40 50 60 70 71% Wages & Salaries 1% Rents Income By Function Performed 5% Interest 9% Proprietor’s Income 14% Corporate Profits Source: Bureau of Economic Analysis

  3. Personal distribution of income Personal Income Received (Percent) 0 10 20 30 40 50 60 Lowest 20% 3.4% Second 20% 8.7% Income Group (Households) Middle 20% 14.7% 23.2% Fourth 20% 50.1% Highest 20% Source: Bureau of the Census

  4. What do we spend our $ on? • Personal taxes • Savings • Personal consumption • Durable goods (cars, furniture, appliances, etc) • Nondurable goods (food, clothing, etc) • Services (haircuts, doctors, yardwork, etc) • Pause the video and list 10 things you purchase.

  5. Businesses • 3 types: • Sole proprietorships – one owner, assumes all the risk, and all the profit. Makes up approx. 80% of all businesses in the U.S. • Partnerships – 2 or more people share the risk and profits. (examples: doctors, lawyers, etc) • Corporations

  6. Corporations Corporations dominate the sales and profits in this country, but in number they are the smallest type of business. Main benefit: limited liability. Owners of the corporation can’t be sued or lose their personal assets.

  7. Principal-Agent Problem The owners of the corporation (stock holders) hire agents (the executives) to run the company. Sometimes their interests don’t coincide. Executives want nice offices, planes, bonuses, etc. Stock holders just want profit!

  8. What is the government’s role? Governments establish the ‘rules’ that everyone must play by. The laws. Government has to watch out for monopolies and get rid of those that cause unfairness. Some monopolies can’t be helped and therefore the government simply ‘controls’ them the best that they can… e.g., electricity, telephone, transportation.

  9. Redistribution of income Some people view markets as ‘inequitable’, and think that the government needs to ‘redistribute’ money. They take money from our taxes and give it to those whom the government thinks need it. This issue is a very big part of the political landscape of our country.

  10. Redistribution of income..cont. Transfer payments – welfare, food stamps, unemployment compensation Market intervention – farm subsidies, minimum wages Taxation – the government takes a higher % of money from the rich than from the poor. This debate is a VERY big issue that is debated especially during elections.

  11. Market failures • When the government perceives that there has been a ‘failure’ in the market system, it tries to correct it. • Two types of failures: • Negative externalities • Positive externalities • Externality – when some of the costs or benefits of a good ‘spill over to’ someone other than the immediate buyer or seller

  12. Negative externalities When one person’s action harms another Example: pollution When a business dumps chemicals in a river that a city gets their drinking water from, the government will step in and force the business to clean it up.

  13. Correcting negative externalities Legislation – passing laws that prohibit pollution is one way to prevent it. Specific taxes – if the government won’t pass a law to prevent it, then a new tax could be enacted that ‘discourage’ the activity, and at the same time collect money that can be used to solve the problem.

  14. Positive externalities When one person benefits from another’s actions. Example: education. Better educated people get better jobs, which generate more income for the government and benefit those around them.

  15. Corrections for positive external. Subsidize consumers – giving low-interest government loans to students so they can attend college. Subsidize suppliers – state governments supply large amounts of money to colleges so they can operate and keep tuition costs down Provide goods via government – to ensure that everyone has a fair chance to participate in something…the postal service.

  16. Private Goods vs Public Goods • Private goods are produced by the competitive market • Rivalry – when I buy it, you can’t have it • Excludability – if I can afford it, I can have it. • Public goods are available to everyone. One person’s benefit does not reduce the benefit to others. • Examples: national defense, environmental protection

  17. Free-rider problem When you gain benefit from something without contributing to its cost. Example – listening to a street performer without paying him for it. Example – I pay for the streets in Martin with my taxes, but people from Dresden can drive on the streets too. Private firms can’t afford to create public goods because of this.

  18. Quasi-Public Goods Goods that could be considered ‘public goods’ but could be offered by private firms who could ‘exclude’ people. Examples: streets, museums, fire protection, trash disposal

  19. Government promoting security Unemployment – the government can increase spending or lower taxes to stimulate private spending Inflation – inflation is a general increase of prices overall. Prices of goods and services rise when spenders try to buy more than the economy’s capacity to produce. Government can reduce its expenditures or raise taxes to combat this.

  20. It ain’t easy When government is trying to figure out if expenditures should be cut, or if taxes should be raised, or if a good can be provided as a public good…a lively debate usually happens. This is one of the reasons our politics plays such an important role in our society. Who we elect will determine in large part how the government gets involved in our lives.

  21. Circular Flow revisited

  22. Federal expenditures

  23. Federal revenues

  24. State Financing • Primary Revenues • Sales & Excise Taxes - 48% • Personal Income Taxes - 34% • Corporate Income Taxes & License Fees – Most of Balance • Primary Expenditures • Education – 35% • Public Welfare – 28% • Health & Hospitals – 7% • Highways – 7% • Public Safety – 4% • Other – 19%

  25. Local financing • Primary Revenues • Property Taxes – 73% • Sales & Excise Taxes – 17% • Primary Expenditures • Education – 44% • Welfare, Health & Hospitals – 12% • Public Safety – 11% • Housing, Parks, & Sewers – 8% • Streets & Highways – 5%

  26. End

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