Week 4 Ch. 5 Notes
Week 4 Ch. 5 Notes Econ 1051
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This 3 page Class Notes was uploaded by Lauren Pike on Friday September 18, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 51 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 09/18/15
Ch 5 Market Failures Public Goods and Externalities Market Failures in Competitive Markets 0 demandside failure when demand curves don t reflect consumers fu willingness to pay for a goodservice o supplyside failure when supply curves don t reflect full cost of producing a goodservice o essentially the market fails to produce optimum amount of product Efficientlv Functioninci Markets 0 productive efficiency production of goods in least costly way 0 allocative efficiency production of the right mix of goodsservices most valued by society 0 if competitive market is to produce efficient outcomes 0 demand curve must reflect consumers willingness to pay 0 supply curve must reflect all production costs Private and Public Goods 0 private goods goods that ppl individually buy and consumer and that private firms can profitably provide bc they keep those that don t pay from receiving benefits 0 Characteristics I rivalry I excludability 0 public goods goods everyone can consume from which no one will be excluded even if they don t pay 0 nonrivalry ex national defense 0 nonexcludability I can create freerider program inability of firm to provide a good bc everyone including nonpayers can get benefit I optimal qt of public good gov tries to estmate demand through surveysvotes adheres to MBmarginal costMC marginal cost rule I cost benefit analysis formal comparison of MB and MC of a gov project to decide whether it s worth doing and to what extent resources should be devoted to it Externalities some costsbenefits of a goodservice are passed on or spill over to someone other than immediate buyerseller o are either benefitscosts to third party 0 negative externalities spillover productionconsumption costs imposed on third parties wo compensation 0 ex environmental pollution o understates total cost of production 0 positive externalities spillover productionconsumption benefits conferred on third parties wo compensation from them 0 too little is produced 0 ex education vaccines Government Intervention 0 direct controls reduce neg ext by passing legislation limiting activity 0 ex clean airwater leg 0 specific taxes 0 excise taxes 0 these taxes raise MC of production 0 subsidies and gov provision 0 used to correct underallocation of resources caused by ext 0 subsidies to buyers I ex coupons 0 subsidies to producers I these reduce producers costs 0 gov provision I gov may decide to offer product for freemin charge I quasipublic goods exclusion could occur but which gov provides bc of perceived widespread and diffuse benefits Marciinal Cost Marciinal Benefits and Eduilibrium Quantitv 0 law of diminishing marginal utility as a person increases consumption of a product while keeping consumption of other products constant there is a decline in the marginal utility that person derives from consuming each additional unit of that product 0 ex more pollution a society accomplishes lower the utility and benefit of next unit of pollution reduction 0 optimal reduction of an externality society s MC MB of reducing an externality Financino the Public Sector 0 taxation releases resources from production of private consumer goodsprivate investment goods L gov shifts resources from public to quasipublic goods Lgtgov must decide how to apportion tax burden total taxes imposed on society 0 benefits received vs ability to pay 0 benefits received principle households and businesses should purchase goodsservices of gov the same way they buy other commodities I those who benefit most should pay necessary taxes to fund them I ex gas taxes often used to fund road repairs 0 drawbacks I how will gov determine benefits that indiv householdsbusinesses receive from public goods I gov can t logically apply BR principle to some gov programs safety net programs 0 ability to pay principle gov should apportion tax burden according to taxpayer income I we don t know each family s ability to pay I no scientific way of making unit comparisons Prooressive Prooortional and Reoressive Tax 0 marginal tax rate rate paid on each additional dollar of incomepurchases 0 average tax rate total tax paid as of income 0 progressive tax av rate increases as income increases 0 proportional tax av rate remains same regardless of income size 0 regressive tax av rate decreases and income increases 0 tax progressivity in US personal income tax progressive general sales tax regressive corporate income tax proportionalprogressive payroll taxes 88 and Medicare overall regressive 145 for Medicare proportional 42 of 1st 11000 and rest of income untaxed 42gt145 means overall regressive property taxes regressive operate same as sales tax federal tax system progressive state and local taxes largely regressive overall US tax system slightly progressive Government s Role in Economv o roles include 0 setting rulesregulations for econ o redistributing income when desireable 0 taking macroeconomic actions to stabilize econ 0 when gov can t fix market failures they don t always do so correctlyefficiently gov failure
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