Market Failures 1 Review 1.Identify the three of the four market failures we have learned in this unit. 2.Explain why are public goods a market failure. 3.Explain why are externalities a market failure. 4.Explain why are monopolies a market failure. 5.By yourself, draw a positive externality. 6.By yourself, draw a negative externality. 7.Use graph to explain the remedy for positive externalities. 8.Use graph to explain the remedy for negative externalities. 9.Name 4 different marsupials. 2 3 Review 1.Define Market Failure. 2.Identify the three of 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. 4 5 Net Worth: over $2.3 billion Net Worth: Nothing Market Failure #4 Unfair Distribution of Wealth 1.What percent of Americans are living in poverty? 2.Why is income distribution a market failure? 6 Income Inequality In 2013, the average American family made $64,030. Everyone is obviously rich. Whats wrong with using the average? Averages reveal absolutely nothing about how income is distributed. How does the government measure distribution of income? 7 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% families should earn 20% 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. 8 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) 9 Measuring Income Distribution Percent of Population Percent of Income Perfect Equality The Lorenz Curve After Distribution The banana gets smaller when the government re-distributes income. The size of the banana shows the degree of income inequality. Lorenz Curve (actual distribution) 11 Income Quintile U.K.ColumbiaChina 20%7.64%3.60%6.02% 40% % % % 12 A A B B A A Gini Coefficient / Index / Ratio 0 (Complete Equality) ~ 1 (Complete Inequality) Gini Coefficient / Index / Ratio 0 (Complete Equality) ~ 1 (Complete Inequality) Percent of Population Percent of Income Perfect Equality Lorenz Curve (actual distribution) A B How is income distributed in the US? Historical Income Table- Income Equality in USA 13 The Gini Coefficient is a number between 0 and 1 that is a measure of Inequality. How is income distributed in the United States? 14 What are possible explanations for income inequality? It is a world problem 2014 World Gini Index 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? 17 18 What are Taxes? Why does the government tax? Two purposes: 1.Finance government operations. Public goods-highways, national defense, 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. 19 Three Types of Taxes 1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people). Ex: Current Federal Income Tax system. 2. Proportional Taxes (flat rate) takes the same percent of income from all income groups. Ex: 20% flat income tax on all income groups. 3. Regressive Taxes takes a larger percent of income from low income groups (takes more from poor people). Ex: Sales tax; any consumption tax. 20 Progressive / Proportional / Regressive (THINK % of Income) 1.Toll road tax ($1 per day) 2.State income tax where richer citizens pay higher % 3.$.45 tax on cigarettes 4.Medicare tax of 1% of every dollar earned 5.Government tax 25 cents every dollar of income % California sales tax 21 Three Types of Taxes Regressive Progressive Regressive Proportional Federal Income Tax Debate 22 Equal Tax of $350 per week IncomeAmount of Tax%Amount to live on $200$350175%-$150 (crime?) $ %$0 $500$35070%$150 $1,000$35035%$650 $5,000$3507%$4,650 Tax tax of 20% per week IncomeAmount of TaxAmount to live on $200$40$160 $350$70$280 $500$100$400 $1,000$200$800 $5,000$1,000$4,000 (Regressive Tax) (Proportional Tax) Federal 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. Shows relationship between tax rate and tax revenue. What would happen if the highest tax bracket was 75%? 24 LAST micro graph to learn!!!! THINK ROBIN HOOD!!!!!! What was his groups name? Merry Men What did they do? Laugh a lotthey were Laffers. What was his weapon of choice? Bow and Arrow What did Robin Hood do? Steal from the rich and give to the poor. What would happen to the amount of travelers through Sherwood forest if he took 95% instead of 39% of their money? What would happen to the total amount of money he collects? 25 The Laffer Curve 26 % Tax Rate Tax Revenue If the government increase taxes rates, tax revenue will increase If the tax rate becomes too high, tax revenue will fall since workers have no incentive to work harder YOU ARE DONE WITH MICRO!!!! 27 28 Practice FRQs 29 Practice FRQ , #2 , #1 A#1 Review Activity: Password Sit down when you are done 1.Public Good 2.Tax 3.Positive Externality 4.Free Rider 5.Marginal Social Cost Round 1 1.Negative Externality 2.Nonexclusion 3.Market Failure 4.Invisible Hand 5.Common Pool Problem Sit down when you are done Round 2