unit 6: market failures and the role of the government 1 copyright acdc leadership 2015
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Unit 6: Market Failures and the Role of the Government
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Review Activity:
Name that Concept
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Sit down when you are done
1.Public Good2.Tax3.Positive Externality4.Free Rider5.Marginal Social Cost
Round 1Round 1
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Sit down when you are done
1.Negative Externality2.Nonexclusion3.Market Failure 4.Invisible Hand5.Common Pool Problem
Round 2Round 2Copyright ACDC Leadership 2015
Review1. Define Market Failure.2. Identify the four market failures we have
learned in this unit. 3. Explain why are public goods a market failure.4. Explain why are externalities a market failure.5. Explain why are monopolies a market failure.6. By yourself, draw a positive externality.7. By yourself, draw a negative externality.8. Use graph to explain the remedy for positive
externalities.9. Use graph to explain the remedy for negative
externalities.10.Name 10 different super heroes.
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Market Failure #4
Unfair Distribution of Wealth and Income
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Net Worth
over $2.3 billion
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Distribution of Wealth in the US
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Income Inequality In 2003, the average American family made
$66,863. Everyone is obviously rich.
What’s wrong with using the average?
Averages reveal absolutely nothing about how income is distributed.
How does the government measure distribution of income?
(Based on 2003 Information) 8
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Gap Between Rich and Super Rich
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THE LORENZ CURVE
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Measuring Income Distribution Review the process:• The government divides all income earning
families into five equal groups (quintiles) from poorest to richest.
• Each groups represents 20% of the population.• If there was perfect equality then 20% of the
families should earn 20% of the income, 40% should earn 40% (and so on).
• The government compares how far the actual distribution is from perfect distribution then attempts to redistribute money fairly.
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Measuring Income Distribution Summary:Group #1 (Poorest 20%)
• Total of $5 (5% of total income)Group #2
• Total of $10 (10% of total income)Group #3
• Total of $15 (15% of total income)Group #4
• Total of $25 (25% of total income)Group #5 (Richest 20%)
• Total of $45 (45% of total income)12
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t of
In
com
e
Perfect Equality
The Lorenz Curve
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100
80
60
55
40
30
2015
5 0
Percent of Families
Per
cen
t of
In
com
e
Perfect Equality
Lorenz Curve (actual distribution)
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The Lorenz Curve
20 40 60 80 100
100
80
60
55
40
30
2015
5 0
Percent of Families
Per
cen
t of
In
com
e
Perfect Equality
Lorenz Curve (actual distribution)
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The Lorenz Curve
The size of the banana showsthe degree of
income inequality.
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Percent of Families
Per
cen
t of
In
com
e
Perfect Equality
Lorenz Curve (actual distribution)
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The Lorenz Curve
Area A
Area B
Gini Coefficient- Statistical
measurement of income distribution. Area A divided by the sum of areas A
and B(the size of the banana)
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Percent of Families
Per
cen
t of
In
com
e
Perfect Equality
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The Lorenz Curve
Government transfer payments
shift the Lorenz Curve toward more equality
Is that good or bad?
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Welfare provides a safety net for citizens(retirement, unemployment, workers comp, health, etc.)
BUT, what are some possible downsides?
Where does the government get the money for welfare?
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What are Taxes?
Why does the government tax?Two purposes:1. Finance government operations.
• Public goods-highways, defense, employee wages• Fund Programs- welfare, social security
2. Influence economic behavior of firms and individuals.
Ex: Excise taxes on tobacco raises tax revenue and discourages the use of cigarettes.
Taxes – mandatory payments made to the government to cover costs of governing.
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Three Types of Taxes1. Progressive Taxes -takes a larger percent of
income from high income groups (takes more from rich people).
Ex: Current Federal Income Tax system
3. Regressive Taxes –takes a larger percentage from low income groups (takes more from poor people).
Ex: Sales tax; any consumption tax.
2. Proportional Taxes (flat rate) –takes the same percent of income from all income groups.
Ex: 20% flat income tax on all income groups
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What kind of taxes are these? (THINK % of Income)
1. Toll road tax ($1 per day)2. State income tax where richer citizens pay
higher % 3. $.45 tax on cigarettes4. Medicare tax of 1% of every dollar earned 5. 8.25% California sales tax
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Three Types of Taxes
Federal Income Tax DebateFederal Income Tax Debate Equal Tax of $350 per week (Regressive Tax)Equal Tax of $350 per week (Regressive Tax) Income Amount of Tax % Amount to live on• $200 $350 175% -$150)[crime?]
• $350 $350 100% $0 • $500 $350 70% $150• $1,000 $350 35% $650• $5,000 $350 7% $4,650
TTaxax tax of 20% per week (Proportional Tax) tax of 20% per week (Proportional Tax) Income Amount of Tax Amount to live on• $200 $40 $160
• $350 $70 $280• $500 $100 $400 • $1,000 $200 $800 • $5,000 $1,000 $4,000
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Federal Income Tax DebateFederal Income Tax Debate
This is our current system. Is it fair?The Progressive tax system is the most
effective way to fight this market failure
Practice
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2008 Audit Exam
272005, #2
282003, #1
GREAT NEWS…
YOU ARE DONE WITH MICRO!!!!
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