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Chapter 4

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Title: Chapter 4


1
Chapter 4 The Public Sector
  • The U.S. Economy Private and Public Sectors

2
Can The Market Fail?
  • What does that mean?

3
Production?
  • When producing a product or service whether the
    government or the market. Best mix of output
    required.
  • What are the factors that make up production?
  • Optimal mix of output (inputs to outputs)
  • What directs resources from one product or
    industry to another ????
  • Prices

4
When the market fails it is a double edge sword
  • Market Fails if not optimal mix.
  • Optimal Mix of Output Most desirable
    combination of output attainable with existing
    resources, technology and social values.
  • Market Failure
  • An imperfection in the market mechanism that
    prevents optimal outcomes.

5
Output decision- wrong point on PPC
  • When market fails- government tends to step in
  • Example Banks fail (govt bails out)
  • Pollution (govt regulates
    externalities)
  • No city parks (govt incentivizes
  • builders to include in
    development)
  • Microsoft has monopoly (govt steps in

6
The Public SectorGovernments role.
  • Questions to ponder
  • What is Public Sector?
  • When do markets fail?
  • Should government step in? (Too Big to Fail?)

7
In real words?Overproducing a good with external
costsUnderproducing a good that has external
benefits.
  • Not enough public parksU
  • Not enough care for environmentU
  • Not enough welfareO
  • Too much separation between top 10 income
    earners and median income earnersO
  • Not adequate security within our borders.U
  • Too many immigrants.?

8
Market FailureIs this evident in todays market?
  • market moves resources from one industry to
    another. (price directs resources) (demand
    responds) (price moves the resources then to
    another demand choice) (at this point
    (competition begins to prevail to level the
    prices)
  • Changes in market prices directs resources
  • Question. Is this movement of resources what
    society really desires? Forcing small cars and
    aluminum trucksIf society does not want this
    market reallocation should government intercede?

9
  • Market failure (forces of S D not leading us
    to BEST point on ppc Who decides what is defined
    as BEST?
  • Enter. Government intervention!
  • Will they perform magic? OR Will it be in worse
    shape?

10
How do you know if optimal mix is met?
  • Optimal mix of ANY GOOD or SERVICE
  • MB MC
  • (Marginal benefit Marginal Cost)
  • If cost gt than benefit the failure occurs.
  • If benefit gt than cost, then market is
    functioning according to other factors (price,
    demand, etc.)
  • Does this apply to our war against terror?

11
Government Can Enter the Market to correct when
market fails
  • Question.
  • Does government improve the mix or make it
  • More complicated
  • Less efficient
  • More costly (now to taxpayers)

12
  • Governments Enter the Market to assure
  • 1. Public Goods
  • 2. Externalities (positive or elimination of
    negative)
  • 3. Market power
  • 4. Equity

13
Property Rights must be fully defined in a
competitive market to yield correct signals of
market failure or success..or externalities are
created.
  • (that means stuff will be manufactured
    depleting the environmental commodities (air,
    water, minerals, etc) because of the profit
    motive While
  • stuff will not be produced (parks, flower
    gardens, etc) because of costs imposed with no
    direct benefit for those doing the production..
    Hence, inefficiency of a market system.

14
Translation
  • If government and/or the consumer was not acting
    as a watchdog. Would corporations be diligent
    about utilizing the proper mix of resourcesIf
    they are, can they compete?
  • Does that always mean regulation increased?
  • Could it mean that consumer sovereignty switches
    to another desire BUT what about things like
    energy would we really know if the provider was
    efficient?

15
What is the tragedy of the commons?
  • Lake Michigan who owns it?
  • No, resources owned in common
  • Do we maintain our houses.. Own property?
  • If we improve our property (paint, build-on) do
    we most often recoup when we sell?
  • No incentive for us to not pollute Lake Michigan.
  • Hence, natural resources are overused and
    degraded(fish die, balance of nature upset)

16
Continued Concept of Common Assets
  • Resources, rivers, lakes, oceans, air all fall
    into them absorbing pollution.
  • If manufacturers can dump wastes or discharge
    smoke without cost they will do so.
  • Manufacturers will choose the least-cost
    combination of inputs and bear only unavoidable
    costs.
  • Many individuals avoid trash service if they can
    burn or dump their garbage.

17
  • No incentive for manufacturer to absorb internal
    costs for being good citizen
  • Remember the tomato canning factory example
  • Fallacy of composition applies here persons and
    firms reason their amount of environmental
    destruction is not significant in the total

18
Creating a Market for External Rights
  • Government creates a market for externality
    rights.
  • Pollution control agency determines amount of
    pollutants permitted without upsetting balance of
    nature (in case of water quality is maintained).
  • If say Lake Monroe can tolerate 500 tons of
    pollutants then this is the amount permitted.
  • This is fixed amount.

S
19
  • Demand for these rights is downsloping as for any
    other input
  • Higher prices fewer rights purchased.. The
    manufacturer can either stop pollution, reduce
    pollution, or purchase from another manufacturer.
  • Higher demand (more firms bidding, higher the
    price)
  • EPA set standards and market bids on rights

20
Do You Remember?
  • Collin County was reprimanded by EPA for
    polluting too heavily.
  • You saw businesses crop up for State
    Inspections.. Franchised to catch polluters
    (cars, emission controls, etc)

21
Two concepts to remember
  • Public goods can be equally consumed by all no
    restrictions
  • Skateboarding in the park Terrorists can also
    go to the park Illegal immigrants can go to
    school Merit Goods.
  • Private goods consumption by one person excludes
    consumption by another..
  • ( my doughnut my car etc)

22
Four Broad Categories of Public Goods
  • Health and Hospitals
  • Indigent have to be treated
  • County medical centers
  • Sometimes charged on ability to pay
  • Highways
  • State and federal government share the cost
  • Education
  • State, Local and Federal government provide
  • National Defense
  • National government provides 5 branches of armed
    services
  • Fed pays the entire cost!

23
  • Public Goods provided jointly to all would also
    include such things as
  • national defense
  • monetary system
  • judicial system

24
  • Opportunity cost if government provides health
    care, private sector cannot compete. Government
    crowds out the private .
  • Remember, the largest opportunity cost of an
    item supplied by government is the best
    alternative use that could have been made of the
    resources required to provide that good.

25
  • If government becomes too restrictive Black
    Markets crop up.
  • examples cigarettes, drugs, bootleggers, diet
    supplements, prescription drugs, etc.
  • Government can and does play an important role in
    markets
  • Rule-maker
  • Umpire
  • What does that mean?

26
  • U.S. Concept of Freedom for All
  • Joint consumption.
  • We all consume federal defense. (If hit by a
    terrorist attack in FL the entire U.S. is
    protected. (even non-citizens even those who
    attack us.) Why? They are free riders.
  • People who pay most taxes actually contribute
    more for these services that we all enjoy. Many
    of us ride free.

27
2nd Area where Government Enters the Market -
EXTERNALITIES
  • What are externalities? costs or benefits of a
    market activity borne by a third party.
  • Spilloversan action when one individual or group
    harms the property of others without their
    consent.
  • Throwing trash in someones back yard
  • Burning ties in the alley
  • Playing your stereo loudly at 300 a.m.
  • Businesses dumping wastes, sludge into rivers
  • People trashing the beach or highway.
  • Electric Companies burning phosphorous fuels

28
Spillover Examples that perpetrate on others
  • Calling police when loud party of teenagers next
    door (actions of teens imposing unwanted cost on
    neighbor)
  • Living in downstairs apartment.. Having upstairs
    neighbors doing Tai Bo when they get off work at
    400 a.m.
  • Calling the city when a neighbor doesnt keep his
    yard mowed on regular basis.

29
Externalities can be positive or negative
  • Homeowners keep lawns immaculate (benefits the
    neighborhood)
  • Scientific study for polio vaccine (others
    benefit beyond scientists recognition)
  • Measles Vaccinations.
  • Education. How would this be a benefit?

30
How can spillovers be corrected?
  • Most obvious way is Legislation.
  • To prohibit
  • To heavily tax the specific product and
    manufacturer. Tax would be derived to allow for
    off-setting the clean-up cost. (Super Fund is
    example)
  • Subsidize both consumers or producers
  • Tax incentives if reduction of pollution and
    compliance adhered to, taxes reduced.

31
There are actually quasi corporations AND quasi
public goods?
  • Quasi-Public Goods.,,
  • Any g s that is provided by private sector,but
    is not provided in quantities demanded.
    Government can assist in this allocation of
    resources.
  • (Parks, Zoos, Educational Institutions)

32
3rd Area where Governments enter the market to
assure accessibility to market power
  • Regulating Economic Activities
  • Ensuring competition- Sherman 1890, Clayton
    1914Antitrust regulation- (FTC)(Microsoft)
  • Drug Industries (FDA)Congress is investigating at
    this time -(drugs in Canada)
  • Regulating working conditions. (EEOC, OSHA)
  • Public utilities (legal monopolies (some states)
  • Controlling social costs (diseconomies of scale.
  • Cost of ruining seashore by off-shore drilling.)
  • Securities Industry (SEC) (accounting fraud, etc)

33
4th Area addressed by government is Equity or
perhaps better stated as Inequity.(ensuring
market economy)
  • 1)Inadequate income (redistribute to have-nots)
  • 2) Merit goods (everyone entitled to some minimum
    of food,clothing, shelter) In-kind transfers in
    food stamps, housing vouchers, health clinics)
  • 3)Social Security and unemployment compensation
    protect peoples economic security by providing
    money when they retire or are unable to work.

34
  • SOURCES OF GOVERNMENT INCOME
  • TAXES
  • Why must government tax?
  • What is a fair tax?
  • Who should pay?

35
  • The primary function of taxes is to transfer
    command over resources (purchasing power) from
    the private sector to the public sector.

36
Income Taxes
  • The Sixteenth Amendment to the U.S. Constitution
    (1915) granted the federal government authority
    to collect income taxes.
  • It is now the largest single source of government
    revenue.

37
What Determines a Fair Tax?
  • Very few people think a fair tax? of taxes as
    payment for certain services rendered.
  • When we purchase a new coat, we have chosen an
    item in the market systempay for it use it.
  • We dont think of that when we call the fire
    department or the police departmenteven if we
    are delinquent on our taxes, they still show up.
  • What if the fire department or police left a
    bill? Ambulance services do. Should they?
  • How should taxes be assessed?---benefits
    received----ability to pay!

38
  • Benefits Received
  • Tax the user- gas tax for drivers- fishing
    license-ramp fees for boats- toll roads-bus and
    train tickets-
  • Pay the government for benefits received- cant
    pay for welfare received!

39
Ability to Pay
  • Should wealthy pay more regardless of benefits
    received?
  • Should income and family size be assessed?
  • Determining fairest principle for a just tax is
    matter of values rather than economics and is
    determined by our political process.
  • Executive Budget for 2015 wants anyone 665,00 up
    to pay more.

40
Other Factors in Evaluating Taxes
  • Total Revenue yielded
  • Effect on Production (destroy incentive?)
  • Bracket Creep (AMT)
  • Moral consequences (sin taxes)
  • Reflection of values shown in taxes imposed
  • Convenience (withholding, quarterly, penalties)
  • Shifting the burden (seller to consumer)
  • Ability to pay (relation of tax base to tax rate)
  • Tax rate percentage that is taxed
  • Tax base subject on which the tax is levied.

41
  • Types of Taxes
  • Progressive tax rate increases as the tax base
    increases
  • Proportional tax rate remains the same
    regardless of the base
  • Regressive tax rate decreases as the base
    increases. (often cited as unfair because it
    places heaviest burden on the least able to pay
    ---sales tax--- social security tax.)

42
Federal Government Tax System
  • Federal government gets most of its revenue from
    individual and corporate income taxes.
  • Next largest amount from Social Security tax
  • Very small portion of revenue from estate and
    gift taxes.
  • Larger share from excise taxes (gasoline,
    jewelry, alcohol, cigarettes, motor vehicles,
    admission to entertainment events,tires)
  • Small portion from tariffs.

43
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44
Where Does All the Money Go? In 2013, the major
entitlement programs - Social Security, Medicare,
Medicaid, and other health care consumed 49
percent of all federal spending. These programs,
and interest on the debt, are on track to consume
an even greater share of spending in future
years, while the portion of federal spending
dedicated to other national priorities will
decline. SHARE OF FEDERAL SPENDING IN 2013
                                                  
                                                  
                                                  
                                   
45
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46
Consumption Tax
  • Greenspan said 3/3/05 taxing consumption instead
    of income would help promote economic growth,
    But warned that a switch raises a challenging
    set of transitional issues.
  • What is a consumption tax?
  • Where is it levied?
  • Who would this hurt the most?

47
Types of Taxes We Pay
  • PERSONAL INCOME TAX
  • Progressive with marginal tax rates
  • Marginal tax rates those assessed on
    additional income ranging from 10 to 35
  • Individuals may deduct
  • Interest on Home mortgages and Property Taxes
  • Interest on State and local bonds

48
Sales Tax
  • At first glance sales tax would appear to be
    proportional. Why is it not?
  • Sales Tax is regressive?
  • Larger portion of a low-income persons income is
    exposed to the tax than is a person with higher
    income.
  • Rich pay no tax on the part of their income that
    is saved when they can shelter it poor are
    unable to save.
  • It is a of income that allows it to become
    regressive

49
Note in Tax Law effective 2005
  • Now in Texas. We can deduct from our gross
    income the amount of sales tax that we paid in
    the tax year reporting. Was renewed for 2014,
    2015 still not sure.
  • Can keep all receipts and add up or use the IRS
    tax table.

50
Payroll Taxes
  • MEDICARE AND SOCIAL SECURITY
  • Regressive
  • Medicare Tax. 1.45 on all wage income
  • Average payroll tax falls (percentage wise) as
    income rises.

51
  • HISTORY OF SOCIAL SECURITY
  • Began in 1937 as OASDHI
  • Program of compulsory savings financed from
    compulsory payroll taxes levied on employees and
    employers.
  • Social Security is a regressive tax

52
History of OASDHI Contributions
  • 1937-50 -3,000 1990 - 51,300 2001 -
    80,400
  • 1951-54 - 3,600 1991 - 53,400 2002 -
    84,900
  • 1955-58 - 4,200 1992 - 55,500 2003 -
    87,000
  • 1959-65 - 4,800 1993 - 57,600 2004 -
    87,900
  • 2005 - 90,000 2006 -
    94,200 2007 - 97,500
  • 1972 - 9,000
  • 1974 - 13,2000 1994 - 60,600 1 1995 -
    61,200
  • 1976 - 15,300 1996 - 62,700
  • - 25,900 1997 - 65,400
  • 1985 - 39,600 1998 - 68,400
  • 1999 - 72,600
  • 2000 - 76,200
  • Since 1981- amounts determined under automatic
    adjustment provisions of the SS Act

53
Social Security Wage Base 2015118,500
  • The wage base is increased every January as long
    as the fund is deficient which is probably
    forever now because
  • People live longer, retire earlier, more drawing
    on fund (disabled, single parents, etc.)
  • Ratio of retirees/workers was significantly
    reduced by year 2010.
  • Eighteen year olds in 2002 will pay over a
    million and a half dollars into SS. Benefits
    received????
  • SS payroll tax today is 7.65 (FICA 6.2 SS
    l.45 Medicare) 6.2 of your wages are withheld.
    Your employer matches that amount for the
    required contribution to the SS Fund up to the
    wage base amount for that year.

54
Social Security Continued
  • The employer also matches the Medicare
    contribution of 1.45 of your monthly earnings
    and there is no ceiling on this amount. Hence,
    this is a continual tax deduction from your
    earnings.
  • if self-employed 15.3 (12.4 SS 2.9 Medicare)
    Wage base applies to SS but no limits on
    Medicare.
  • As a self-employed person, you get to take a
    special deduction from your income when it comes
    time to pay your federal income tax.(l/2 of SS
    paid goes under deduction for adjusted gross
    income)

55
Economics of Transfer Payments
  • Redistribution through public sector will reduce
    the size of the economic pie
  • Weakens the link between productive activity and
    reward (taxes increased reduce individual reward
    for hard work-less productive.
  • As public policy redistributes large share of
    income,more resources flow into increasing it

56
Economics of Transfer
  • Higher taxes to finance redistribution will
    induce taxpayers to focus less on income
    producing activities and more on income shelters
    higher incomes have greater opportunity here
  • When leakages flow in taxes rather than in
    savings (money is unproductive)
  • Money that is productive generates more capital
  • More capital generates more jobs.
  • More jobs generates more income.

57
Merit Goods
  • The government is called upon to distribute merit
    goods when the market does not provide enough.
  • A merit good is a good or service society deems
    everyone is entitled to some minimal quantity .
    Public goods have two particular characteristics.
    They are
  • Non-excludable - once the goods are provided, it
    is not possible to exclude people from using them
    even if they haven't paid. This allows
    'free-riders' to consume the good without paying.
  • Non-rival - this means that consumption of the
    goods by one person does not diminish the amount
    available for the next

58
  • Taxes paid today go to pay benefits for people
    drawing today.
  • Do you think there is a special fund where the
    SS dollars go???

59
Continued SS Funding
  • Today 3 workers for every person drawing.
    (extra money in fund invested in U.S. Treasury
    bonds)
  • Number of retirees is increasing and number of
    workers/retiree is decreasing. In 30 years 2
    workers for every person drawing.
  • By 2016 - U.S. paying out more in retirement
    benefits than collecting
  • By 2038- the fund is projected to be empty
    (spring,2004, released data that said 2052)
  • Re-design of system is imperative.

60
More Grim Statistics Concerning SS
  • 70 of SS goes to retirees - avg monthly benefit
    of 898.20
  • 15 to disabled workers and families
  • May, 2003- avg benefit for disabled workers was
    837.70
  • 15 goes to widows, widowers, and families avg
    check of 850.80
  • By 2030-twice as many older Americans 35 million
    to 70 million. Now there are 3.4 workers for
    every beneficiary by 2030 there will be just 2.1
    workers for each beneficiary.

61
Nobody gets any if their aint none!Incredible
Bread Machine, script, 1970
  • EXPLAIN

62
Back to Tax Structure!
  • So realizing how many poor people there are in
    the U.S
  • Which of the three types of taxes would you
    prefer the federal government to use?
  • Which tax for state government to use?
  • Which tax for local government to use?
  • How would you fund schools if you had a vote?
  • How about taxing wealthy more?
  • Who are wealthy?
  • What is considered poor?

63
POVERTY LEVEL2014 POVERTY GUIDELINES FOR THE 48
CONTIGUOUS STATESAND THE DISTRICT OF COLUMBIA
Persons in family/household Poverty guideline
For families/households with more than 8 persons, add 4,060 for each additional person. For families/households with more than 8 persons, add 4,060 for each additional person.
1 11,670
2 15,730
3 19,790
4 23,850
5 27,910
6 31,970
7 36,030
8 40,090
64
MORE INTERESTING FACTS
  • MEDIAN INCOMES in U.S.
  • 1974 14,747 According to a separate
  • 1978 20,428 report from the Census
  • 1982 27,619 Bureau (last week of Sept
  • 1986 34,716 2002), American
  • 1990 41,451 households had taken a
  • 1993 45,161 beating during last years
  • 1997 53,350 recession unemployment
  • 2000 62,228

65
Median Continued
  • ,

2002 43,381
2003 43,318
2005 46,326
2007 50,233
2008 44,389
2013 52,250
66
Income Distribution in Fifths
The first fourth are figures at the upper Limit
of each 5th Figure The top 5 Is not
67
Personal income is unequally distributed in U.S.
Top20 of households receive almost 50
incomeTo redistribute equally all bars on the
20
1997 1 3.6. 2 8.8 3 15.0 4 23.2 549.4
2001 1 3.5 2 8.7 3 14.6 4 23.0 5 50.2
68
Income Inequality
69
Why is the U.S. Economy owing billions of
dollars?If you subsidize something you get more
of it.Dr. Milton Friedman, Free to Choose
  • Virtually all of the recent growth in federal
    expenditure has come from increased income
    transfers, not purchases of goods and services.

70
So, it all gets back to Joe Q Citizen Taxes paid
to government.
  • Question is
  • What kind of an economy do we Joe Qs want?
  • The primary function of taxes is to transfer
    command over resources (purchasing power) from
    the private sector to the public sector.
  • Why from private to public? Why not the other
    way around?

71

72
  • Other Resources to Check
  • http//www.brook.edu/
  • http//www.ncpa.org
  • http//www.ntu.org/
  • http//www.cagw.org/site/PageServer

73
State and Local Tax Sources
74
  • POWER CORRUPTS AND ABSOLUTE POWER CORRUPTS
    ABSOLUTELY!
  • Lord Acton
  • POWER TO TAX IS POWER TO DESTROY
  • Chief Justice John Marshall. McCullough vs
    Maryland

75
Who is best equipped to distribute resources?

76
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