Econ 2305-011, week 6, Economic function of Goverment.
Econ 2305-011, week 6, Economic function of Goverment. ECON 2305-001 PRINCIPLE OF MACROECONOMICS
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This 11 page Class Notes was uploaded by Beniam Notetaker on Thursday October 6, 2016. The Class Notes belongs to ECON 2305-001 PRINCIPLE OF MACROECONOMICS at University of Texas at Arlington taught by DR. Ronnie Liggett in Fall 2016. Since its upload, it has received 3 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Business at University of Texas at Arlington.
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Date Created: 10/06/16
9/30/2016 Review • Prices are a signal Economic (and Political) Functions • “In its ideal form, a price system allows all of Government resources to move from lower-valued uses to higher-valued uses via voluntary exchange, by which mutually advantageous trades take What role do they play in economic activity? place.” (Free-enterprise!) • “…consumers are sovereign.” (ultimate power) Where does Rule of Law fit in? Important ‘Institutions’ ( Chap 7 & Review) • Rule of Law • Private Property – (includes Property Rights) • Political Stability – (includes “Honest” government) 1 9/30/2016 What if markets “fail”? What do we mean by “fail”? • Market Failure • Too few or too many resources in specific economic activity – A situation in which the unrestrained market economy leads to too few or too many resources • Micro Failures going to a specific economic activity • Macro Failures • Prevents economic efficiency and individual freedom • Is addressed by public policy (government) Economic Functions of Government • In a pure market system, economic efficiency FOR MICRO FAILURES occurs when individuals know and must bear Legal Framework (Institutions) the true opportunity cost of their actions Maintain Competition (Competitive & Open Markets) – In some cases, the price that someone actually Re-Distribution of Income pays for a resource, good, or service is higher or Reallocation of Resources (Property Rights) lower than the opportunity cost that all society pays. (We will explain this in more detail over the FOR MACRO FAILURES next few slides) Stabilize the Economy (reluctantly) 2 9/30/2016 Legal Framework (Institutions) Maintain Competition • “Rules of the Game” – Don’t underestimate the importance! • Monopoly situation • Sports – think about the rules… – “Coach, we’re letting them play.” • AT&T - early 80’s • Administration of Justice • Recent Years --- AT&T Wireless & T-Mobile – Legal System • FCC, FAA, EPA, SEC, FDA, etc. • American Airlines & US Air (Perhaps the biggest impact of Government…?) • Don’t be misled by “competition”… Re-Distribution of Income (3 Types) Reallocation of Resources (Per Text – “Political”) • Income Tax (Progressive) • Public v. Private Goods – Aren’t all taxes a “re-distribution”? – Private Good --- Consumption by one person excludes consumption by another. (Re-Dist to FUND vs. Re-Dist for EQUITY) • Transfer Payments – Define • Price Controls – Per Chapter 5 3 9/30/2016 Public Good --- Consumption by one person does What’s the “free rider” problem? • A person who benefits but does not contribute to not exclude consumption by another. the payment for the benefit. Solves Free Rider Problem Externalities (not in book) • Externalities – Defined: • Resource Misallocations - Types – Occur when the consequences of an economic activity spill over to affect third parties – Market Overallocates = External Costs • Two Types • Negative Externality – Negative (Also called Spillover Costs) – Market Underallocates = External Benefits – Positive (Also called Spillover Benefits) • Positive Externality • Third Parties – Parties who are not directly involved in a given activity or transaction • Property Rights – Rights of an owner to use and exchange property 4 9/30/2016 • Government can also correct positive externalities… • Government can correct negative externalities… – Government financing and production – Special taxes (i.e. a pollution tax or “effluent fee”) – Subsidies – Regulations, etc. – Regulation (Essentially saying – “We want MORE of this”) (Essentially saying – “We want LESS of this”) • Market failure - an example: Negative Externality… • Assume… • No government regulation against pollution • A town with clean air Without considering the • A steel mill opens and emits smoke/smog! impact of pollution, they produce 110 Million – DIRTY AIR Tons (S1). If the negative – More respiratory diseases externality is considered, – Dirtier clothes, houses, cars the price would be higher per S2 and only 100 Million Tons would be produced. 5 9/30/2016 Externalities, continued… What’s the issue? (City A) 6 9/30/2016 Positive Externality City A – Supplying “services” st Pizza Joint on 1 Floor… Looking at this You rent upstairs… another way, City A You love PIZZA! Citye of is able to produce Services more City Services And the AROMA! by not taking care PIZZA issue they areon “Spillover Benefit” creating. Quantity of City Services Another example of Positive Externality… Could music be a Negatively Externality??? • You live in apartment • Neighbor plays sax… What if it’s too loud??? • You enjoy the “free music”… • Spillover Benefit… (Fyi – This is Kirk Whalum) 7 9/30/2016 Education…. I guess that answers the question • What does it give us? – Degree / Diploma – Job… • What else do we get? – Social interaction – Informed citizens • Better decisions? Health, Politics?? – Lower crime rate Back to the positive externalities…. Education As Positive Externality Legal Framework, reprise… • Kelo v. City of New London (Connecticut) • http://www.youtube.com/watch?v=4N1svadJ Q40 DP = Perceived Demand DA = Actual Demand 8 9/30/2016 The neighborhood today… • The court held that if a legislative body has found that an economic project will create new jobs, increase tax and other city revenues, and revitalize a depressed urban area (even if that area is not blighted), then the project serves a public purpose, which qualifies as a public use. Kelo Decision – Interesting Result… • Who Affirmed --- Conservative or Liberal Wing? • Affirmed – 5 – Breyer, Ginsburg, Kennedy, Souter, Stevens (i.e. – take the property and give it to someone who will make “better” use of it!) • Dissenting – 4 – O’Connor, Rehnquist, Scalia, Thomas (Re: Exxon-Mobil v. Government) 9 9/30/2016 Macro Failure “Government has a roll in economic stability”(?) • Employment Act of 1946 • Unemployment • Inflation – Full production, employment – Embraced Keynesian Economics • National Debt (?) • Trade Deficit (??) • Humphrey Hawkins – 1978 – Provided for specifics, attempt to quantify goals – 4% or less unemployment – 4% or less inflation… down to 0% (not feasible) – Adjustable by congress… Before we move on…. Who Pays Federal Income Taxes? Macro Points of Interest…. Who’s paying taxes? Or – who’s not paying their “fair” share? How’s the recovery? Whfair share??? What’s holding things up? 10 9/30/2016 Who Pays? Another view… It’s the recovery stupid! • Top 1% - 37% of Federal Income Taxes • Top 10% - 71% • Top 25% - 87% • Top 50% - 98% • Bottom 50% - 2% Very progressive system! 11
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