AP Micro 6-6 Summary V2

7/24/2019 AP Micro 6-6 Summary V2

1/89


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What is the Free

Market&

'(a)italism*

2


3/89

+ (hara,teristi,s of Free Markets1- Little government involvement in the e,onom.-

'Laisse Faire 0 Let it #e*2- ndividuals W resour,es and determine 3hat and

ho3 to )rodu,e4 and 3ho gets 3hat5s )rodu,ed-

- The o))ortunit. to make "RFT gives )eo)le(7T87 to )rodu,e 9ualit. items effi,ientl.-

- Wide variet. of goods availa#le to ,onsumers-

+- (om)etition and $elf;nterest 3ork together to

regulate the e,onom.-

3

The government5s


4/89


5/89

@oes the Free

Market ever F!Lto meet so,iet.5s

needs&

5


6/89

What is a Market Failure&! situation in 3hi,h the free;market s.stem

fails to satisf. so,iet.5s 3ants-

'When the invisi#le hand doesn5t 3ork-*

"rivate markets do not effi,ientl. #ring

a#out the allo,ation of resour,es-

What5s the resultA

The government must ste) in tosatisf. so,iet.5s 3ants-

(ir,ular Flo3 Model Revie3 6


7/89

7


8/89

?o3 does the freemarket F!L&

8


9/89

The Four Market Failures

We 3ill fo,us on four different marketfailures:1- "u#li, Goods

2- 7=ternalities 'third;)erson side effe,ts*- Mono)olies

- Unfair distri#ution of in,ome

n ea,h of the a#ove situations4the government ste)s in to

allo,ate resour,es more effi,ientl.-

9


10/89

Market Failure %1:

"U>L( G@$


11/89

f there 3as no government4 ho3 3ould

s,hools4 )arks and free3a.s #e different&

Would there #e enough to meet our needs&

"u#li, Goods

11

8ideo: Fire @e)artment


12/89

Wh. must the government )rovide )u#li,

goods and servi,es&

t is im)ra,ti,al for the free;market to

)rovide these goods #e,ause there is littleo))ortunit. to earn )rofit-

This is #e,ause of the Free;Rider "ro#lem

Free Riders are individuals 3ho#enefit 3ithout )a.ing-

"u#li, Goods

12


13/89

What5s 3rong 3ith this )i,ture&

13


14/89

The Free Rider

"ro#lem

14

7=am)les:1- "eo)le 3ho do3nload musi, illegall.

2- "eo)le 3ho 3at,h a street )erformer and don5t )a.

- Teenagers 3ho live at home and don5t have a


15/89

15

(anadian

Militar.$)ending:

B21-C >illion

U-$- Militar.$)ending:

B66D >illion

Wh. doesn5t

(anada s)end

more on its

militar.&

@oes an.one free ride off .ou&


16/89

Free Riders kee) firms

from making )rofits-f left to the free market4

essential servi,es 3ould

#e under;)rodu,ed-

To solve the )ro#lem4 the

government ,an:

1- Find ne3 3a.s to

)unish free riders-2- Use ta= dollars to

)rovide the servi,e to

ever.one-

What5s 3rong 3ith Free Riders&

16


17/89

The Final 7=am

am 3illing to give 1DDE on the finale=am to 3hi,hever ,lass gives me B14DDD-

7ver.one in the ,lass 3ill get 1DDE even if

the. don5t )a.-

Who is 3illing to )a.&What a#out those 3ho refuse to )a.&

$olution&

787R7 )a.s a mandator. ta=

and all re,eive the same #enefits- 17


18/89

@efinition of "u#li,Goods

18


19/89


20/89

dentif. 3hi,h of the follo3ing are

TRU7 )u#li, goods

'have non;e=,lusion and non;rival,onsum)tion*:

1- ?am#urgers2- (a#le T8

- Free "u#li, 7du,ation

- ?omes

+- $treet lights

6- ?igh3a.s20


21/89

When should thegovernment get involved in

the e,onom.&

21

Worker $afet. La3s >ar#er $ho) Li,enses

7ver. so,iet. needs to de,ide ho3 mu,h

government involvement is desira#le

>ank >ailouts


22/89

Unit 6:Market Failures and theRole of the Government

22


23/89

Revie3

1- List the ,hara,teristi,s of the Free Market-

2- @efine Market Failure-- What is the invisi#le handH&

- List the Market Failures-

+- Wh. must the government )rovide )u#li,

goods&

6- @efine Free Rider-

I- What is 3rong 3ith having free riders&

C- List 1D streets in Roseville/Granite >a.-

23


24/89

Wh. doesn5t the free market)rovide them&

There is little o))ortunit. to earn)rofit-

Wh. T&

ndividuals #enefit 3ithout )a.ing-

Market Failure %1

"U>L( G@$

24


25/89

?o3 do 3e de,ide

ho3 man. )u#li,

goods 3e need&

25


26/89

(an the governmentA1- "revent 3ild fires in "la,er (ount.

forever&2- 7nsure that no one ever s)eeds on the

free3a.&

- (reate a resear,h station on Mars&- $to) )ollution from fossil fuels&

+- (om)letel. sto) illegal immigration&

6- Make sure ever.one in the U-$- has a ut the ,osts out3eigh the #enefits-

?o3 does the government de,ide ho3

man. )u#li, goods to )rovide&


27/89

?o3 does the government determine 3hat

9uantit. of )u#li, goods to )rodu,e&

t uses 'sur)riseJ* $u))l. and @emand

@emand for "u#li, Goods;

The Marginal $o,ial >enefit of the good as

determined #. ,itiens5 3illingness to )a.-

$u))l. of "u#li, Goods;

The Marginal $o,ial (ost of )roviding

additional 9uantities/amounts of the good-

8ideo: @am Traged.


28/89

@emand for a e3 "ark

Marginal 3illingness to )a. higher ta=es

% of"arks

!dam is3illing to

)a.

Kill is3illing to

)a.

$o,iet.5s@emandfor "arks

Marginal(ost

1 B B+ B B+2 B B BI B+

B2 B B+ B+ B1 B2 B B+

+ BD B1 B1 B+

!ssume:1- There are onl.

t3o )eo)le in

so,iet.-2- 7a,h additional

)ark ,osts B+

?o3 man. )arks

should #e made&


29/89

% of"arks

!dam is3illing to

)a.

Kill is3illing to

)a.

$o,iet.5s@emand'M$>*

Marginal(ost )er

"ark


B2 B B+ B+ B1 B2 B B+

+ BD B1 B1 B+




30/89

% of"arks

!dam is3illing to

)a.

Kill is3illing to

)a.

$o,iet.5s@emand'M$>*

Marginal$o,ial(ost


B2 B B+ B+ B1 B2 B B+

+ BD B1 B1 B+



)timalH amount

of a )u#li, good

is 3here

M$> 0 M$(J

$ l d @ d f " #li " k


31/89

Price

Quantity of Parks

$ 9

7

5

3

1

0 1 2 3 4 5

D=MSB

$u))l. and @emand for "u#li, "arks

The @emand is

e9ual to the

marginal #enefit

to so,iet.

$ l d @ d f " #li " k


32/89

$ 9

7

5

3

1

0 1 2 3 4 5

The su))l. is the

)u#li, good5s

marginal ,ost toso,iet.

S=MSC

D=MSB

$u))l. and @emand for "u#li, "arks

Price

Quantity of Parks

M$> 0 M$(

1- What if the government

made 1 )ark&

2- What if the governmentmade )arks&


33/89

Market Failure %2:

7T7R!LT7$

33

Wh t 7 t liti &


34/89

!n e=ternalit. is a third;)erson side effe,t-When there are 7T7R!L #enefits or ,osts to

someone T?7R than the original de,ision maker-

Wh. are 7=ternalities Market Failures&The free market fails to in,lude e=ternal ,osts or

e=ternal #enefits-With no government involvement4 there 3ould

#e too mu,h of some goods and too little of others-

7=am)le: $moking (igarettes-The free market assumes that the ,ost of smoking is

full. )aid #. )eo)le 3ho smoke-The government re,ognies e=ternal ,osts and makes

)oli,ies to limit smoking-

What are 7=ternalities&

34


35/89

egative 7=ternalities

35

ti 7 t liti


36/89

$ituation that results in a ($T for a different

)erson other than the original de,ision maker-

The ,osts s)ill overH to other )eo)le or so,iet.-7=am)le: Noram is a ,hemi,al ,om)an. that )ollutes

the air 3hen it )rodu,es its good-Noram onl. looks at its T7R!L ,osts-

The firm ignores the so,ial ,ost of )ollution

$o4 the firm5s marginal ,ost ,urve is its su))l. ,urve

When .ou fa,tor in 7T7R!L ,osts4 Noram is

)rodu,ing too mu,h of its )rodu,t-

The government re,ognies this and limits

)rodu,tion-

egative 7=ternalities'aka: $)illover (osts*

36


37/89

8ideo; Whistle Ti)s

37

M k t f (i tt


38/89

"

O

@0M$>

$u))l. 0

Marginal"rivate (ost

OFree Market 38

Market for (igarettesThe marginal )rivate ,ost doesn5t in,lude the

,osts to so,iet.-

M k t f (i tt


39/89

"

O

@0M$>

$u))l. 0

Marginal"rivate (ost

OFree Market 39

Market for (igarettes

$u))l. 0Marginal

$o,ial (ost

What 3ill the M(/$u))l. look like 3hen 7T7R!L

,osts are fa,tored in&

O)timal

M k t f (i tt


40/89

"

O

@0M$>

$0M"(

OFree Market 40

Market for (igarettes

$0M$(

O)timal

!t OFM the M$( is

greater than the M$>-Too mu,h is #eing

)rodu,ed

f the market )rodu,es OFM 3h. is it a market

failure&

verallo,ation

M k t f (i tt


41/89

"

O

@0M$>

OFree Market 41

Market for (igarettesWhat should the government do to fi= a negative

e=ternalit.&

O)timal

$0M"(

$0M$(

$olution: Ta= the

amount of the

e=ternalit.

'"er Unit Ta=*

M k t f (i tt


42/89

"

O

@0M$>

OFree Market 42

Market for (igarettesWhat should the government do to fi= a negative

e=ternalit.&

O)timal

$0M"(1

$0M$(

$olution: Ta= the

amount of the

e=ternalit.

'"er Unit Ta=*

0M"(2

M$> 0 M$(

$u))l. ,urve shifts left '.ello3*P

amount of ta= is the verti,al

distan,e #et3een M"(1 and M$(

'#la,k*


43/89

43


44/89

"ositive 7=ternalities

44

"ositive 7=ternalities


45/89

"ositive 7=ternalities'aka: $)illover >enefits*

$ituations that result in a >77FT for someoneother than the original de,ision maker-

The #enefits s)ill overH to other )eo)le or so,iet.-'7: Flu 8a,,ines4 7du,ation4 ?ome Renovation*

7=am)le: ! mom de,ides to get a flu va,,ine forher ,hild

Mom onl. looks at the T7R!L #enefits-$he ignores the so,ial #enefits of a healthier so,iet.-

$o4 her )rivate marginal #enefit is her demandWhen .ou fa,tor in 7T7R!L #enefits4 themarginal #enefit and demand 3ould #e greater-

The government re,ognies this and su#sidies flushots- 45

Market for Flu $hots


46/89

"

O

@0Marginal

"rivate >enefit

$ 0 M$(

OFree Market 46

Market for Flu $hotsThe marginal )rivate #enefit doesn5t in,lude

the additional #enefits to so,iet.-



47/89

"

OOFM 47

Market for Flu $hotsWhat 3ill the M$>/@ look like 3hen

7T7R!L #enefits are fa,tored in&

O timal

@0Marginal

"rivate >enefit

$ 0 M$(

@0Marginal

$o,ial >enefit



48/89

"

O

@0M$>

48

Market for Flu $hotsf the market )rodu,es OFM 3h. is it a market

failure&

$ 0 M$(

@0Marginal

$o,ial >enefit

OFM O timal



49/89

"

O 49


Underallo,ation

$ 0 M$(

@0Marginal

$o,ial >enefit

OFM O timal

!t OFM the M$( is less than the M$>-

Too little is #eing )rodu,ed



50/89

"

OOFM 50


O timal

@0M">

$ 0 M$(

@0M$>

What should the government do to address a

)ositive e=ternalit.&

$u#sidie the amount of the

e=ternalit. '"er Unit $u#sid.*

0M">

$u#sid. shifts M$>/@ right '.ello3*P

amount of su#sid. is verti,al distan,e

#et3een M> ,urves '#la,k*


51/89

Revie31- What is an 7=ternalit.&

When 7T7R!L #enefits or e=ternal ,ostsare on someone other than the original de,isionmaker-

2- Wh. are 7=ternalities Market Failures&

The free market fails to in,lude e=ternal ,ostsor e=ternal #enefits-

- 7=)lain 3h. the gra)h for a egative7=ternalit. has t3o su))l. ,urves-T3o (osts: "rivate and $o,ial

- 7=)lain 3h. the gra)h for a "ositive7=ternalit. has t3o demand ,urves-

T3o >enefits: "rivate and $o,ial 51


52/89

The 7,onomi,s of"ollution

52

7 i f " ll ti


53/89

7,onomi,s of "ollutionWh. are )u#li, #athrooms so gross&

The Traged. of the (ommons'!Q!: The (ommon "ool "ro#lem*

Goods that are availa#le to ever.one 'air4

o,eans4 lakes4 )u#li, #athrooms* are often

)olluted #e,ause no one has the in,entive to

kee) them ,lean-

There is no monetar. in,entive to use them

effi,ientl.-Result is high s)illover ,osts-

7=am)le: ver fishing in the o,ean 53


54/89

The (ommon "ool "ro#lem

54

"erverse n,entives


55/89

"erverse n,entives

1- n 1ID4 the government tried to )rote,t endangered

3ood)e,kers #. re9uiring land develo)ers to re)ortnests on their land to the 7"!-The )o)ulation of these #irds de,reased- Wh.&

Land o3ners 3ould kill the #irds to avoid risk of length.)rodu,tion dela.s- 'Qno3n as $hoot4 $hovel4 and $hut U)H*

2- !ssume the government 3anted to limit a firm from)olluting- The. tell the firm it 3ill #e ins)e,ted t3i,eand it must redu,e )ollution #. +E-

The amount of )ollutants 3ould in,rease- Wh.&This firm 3ill have the in,entive to )ollute more )rior to

the initial ins)e,tion-

!re their market solutionsH to these

)ro#lems& 55

?o3 ,an markets and self interest hel) to


56/89

?o3 ,an markets and self interest hel) tolimit )ollution&

Government ,an sell the right to )ollute

1DD

2DD

+D+D

1DD

!ssume the lake ,an

naturall. a#sor# +DD

gallons of )ollutants

ea,h .ear

o3 3hat does ea,h

firm have the in,entive

to do&

The Gov5t sells ea,h

firm the right to

)ollute a set num#er

of gallons

2D1D "ra,ti,e FRO


57/89

57

2D1D "ra,ti,e FRO


58/89

Market Failure %

Mono)olies

58


59/89

Mono)ol. Revie31- @ra3 a mono)ol. making a )rofit- La#el

)ri,e and out)ut4 and shade 'or la#el*

)rofit-

2- dentif. three s)e,ifi, reasons 3h.

mono)olies are #ad-

- La#el the Fair Return )ri,e and out)ut-

- La#el the $o,iall. )timal )ri,e andout)ut-

+- 7=)lain 3h. ta=ing a mono)ol. is a #ad

idea- 59

Mono)ol.


60/89

D

M

$9

!

7

"

5

43

2

MC#C

601 2 3 4 5 " 7 ! 9 10 O

"

Profit =$5

Unregulated $o,iall.)timal

Fair

Return

Mono)ol.


61/89

Government in !,tion:

!ntitrust La3s

Legislative 7=e,utive Kudi,ial

61

W?!T !R7 !TTRU$T L!W$&


62/89

W?!T !R7 !TTRU$T L!W$&La3s designed to )revent mono)olies and

)romote ,om)etition-

!fter the (ivil War4 advan,es in te,hnolog. and

trans)ortation led to national markets-

7ventuall. onl. a fe3 firms #egan to dominate

industries: railroads4 steel4 meat)a,king4 ,oal4 et,-

Wh. are mono)olies a Market Failure&

Mono)olies destro. the ke. ingredient of the free

market s.stem (om)etition-

To fi= this M!RQ7T F!LUR74 the government must

get involved-

62

W?!T @7$ T?7 G87RM7T @&


63/89

W?!T @7$ T?7 G87RM7T @&Legislative >ran,h

"assed la3s designed to sto) mono)olies

$herman !,t of 1CD;Every person who shall monopolize or conspire to

monopolizeshall be deemed guilty of a felony.

7=e,utive >ran,hThe Federal Trade (ommission must a))rove all

,or)orate mergers- 'Like !TST and A*

When firms use anti;,om)etitive ta,ti,s the

@e)artment of Kusti,e files suit against them-

Kudi,ial >ran,h

The ,ourts find the firm guilt. or not guilt. and assign

a )unishment- 63


64/89

64

Revie3


65/89

Revie31- @efine Market Failure-2- dentif. the four market failures 3e have

learned in this unit-- 7=)lain 3h. are )u#li, goods a market failure-- 7=)lain 3h. are e=ternalities a market failure-+- 7=)lain 3h. are mono)olies a market failure-

6- >. .ourself4 dra3 a )ositive e=ternalit.-

I- >. .ourself4 dra3 a negative e=ternalit.-

C- Use gra)h to e=)lain the remed. for )ositive

e=ternalities-- Use gra)h to e=)lain the remed. for negative

e=ternalities-

1D-ame 1D different su)er heroes- 65


66/89

Market Failure %

Unfair @istri#ution

of Wealth

66

Net Worth

over $2.3

billion


67/89

1- What )er,ent of !meri,ans are living in

)overt.&

2- Wh. is in,ome distri#ution a market failure&67

n,ome ne9ualit.


68/89

n,ome ne9ualit.n 2DD4 the average !meri,an famil. made

B664C6- 7ver.one is o#viousl. ri,h-What5s 3rong 3ith using the average&

!verages reveal a#solutel. nothing a#out ho3

in,ome is distri#uted-

?o3 does the government

measure distri#ution of in,ome&$MUL!T

'>ased on 2DD nformation* 68


69/89

T?7 LR7N(UR87

$MUL!T

69

Measuring n,ome @istri#ution


70/89

Measuring n,ome @istri#utionRevie3 the )ro,ess:

The government divides all in,ome earningfamilies into five e9ual grou)s 'quintiles* from

)oorest to ri,hest-

7a,h grou)s re)resents 2DE of the )o)ulation- f there 3as )erfe,t e9ualit. then 2DE of the

families should earn 2DE of the in,ome4 DE

should earn DE 'and so on*-

The government ,om)ares ho3 far the a,tual

distri#ution is from )erfe,t distri#ution then

attem)ts to redistri#ute mone. fairl.-

70

Measuring n,ome @istri#ution


71/89

Measuring n,ome @istri#ution$ummar.:

Grou) %1 '"oorest 2DE* Total of B+ '+E of total in,ome*

Grou) %2

Total of B1D '1DE of total in,ome*Grou) %

Total of B1+ '1+E of total in,ome*

Grou) %

Total of B2+ '2+E of total in,ome*

Grou) %+ 'Ri,hest 2DE*

Total of B6+ '+E of total in,ome*

71

The Loren (urve


72/89

2D D 6D CD 1DD

1DD

CD

6D

D

2D

D

"er,ent of Families

"er,entof1n,ome

"erfe,t 79ualit.

The Loren (urve

72

The Loren (urve


73/89

2D D 6D CD 1DD

1DD

CD

6D

++

D

D

2D

1+

+

D

"er,ent of Families

"er,entof1n,ome

"erfe,t 79ualit.

Loren (urve

'a,tual distri#ution*

73

The Loren (urve

The Loren (urve


74/89

2D D 6D CD 1DD

1DD

CD

6D

++

D

D

2D

1+

+

D

"er,ent of Families

"er,entof1n,ome

"erfe,t 79ualit.

Loren (urve

'a,tual distri#ution*

74

The Loren (urve

The sie of the

#anana sho3sthe degree of

in,ome ine9ualit.-

The Loren (urve


75/89

2D D 6D CD 1DD

1DD

CD

6D

++

D

D

2D

1+

+

D

"er,ent of Families

"er,entof1n,ome

"erfe,t 79ualit.

!fter @istri#ution

75

The Loren (urve

The #anana gets

smaller 3hen thegovernment re;

distri#utes in,ome

Welfare )rovides a safet. net for ,itiens


76/89

'retirement4 unem)lo.ment4 3orkers ,om)4 health4 et,-*

>UT4 3hat are some )ossi#le do3nsides&

Where does the government get

the mone. for 3elfare&

76


77/89

Ta=es

77

What are Ta=es&


78/89

What are Ta=es&

Wh. does the government ta=&

T3o )ur)oses:

1- Finan,e government o)erations- "u#li, goods high3a.s4 defense4 em)lo.ee

3ages

Fund "rograms 3elfare4 so,ial se,urit.

2- nfluen,e e,onomi, #ehavior of firms and

individuals- 7=: 7=,ise ta= on to#a,,o raises ta= revenue and

dis,ourages the use of ,igarettes-

Ta=es mandator. )a.ments made to the

government to ,over ,osts of governing-

78

Three T.)es of Ta=es


79/89

Three T.)es of Ta=es1- "rogressive Ta=es ;takes a larger)er,entage of

in,ome from high in,ome grou)s 'takesdollars at in,reasing rate from ri,her )eo)le*-

7=: (urrent Federal n,ome Ta= s.stem

- Regressive Ta=es takes a larger)er,entage

from lo3 in,ome grou)s 'takes more from )oor

)eo)le*-

7=: $ales ta=P an. ,onsum)tion ta=-

2-"ro)ortional Ta=es 'flat rate*takes the same

)er,ent of in,ome from all in,ome grou)s-

7=: 2DE flat in,ome ta= on all in,ome grou)s

79



80/89

What kind of ta=es are these&

'T?Q E of n,ome*

1- Toll road ta= 'B1 )er da.*

2- $tate in,ome ta= 3here ri,her ,itiens )a.higher E

- B-+ ta= on ,igarettes

- Medi,are ta= of 1E of ever. dollar earned+- C-2+E (alifornia sales ta=

80


Federal n,ome Ta= @e#ateFederal n,ome Ta= @e#ate


81/89

Federal n,ome Ta= @e#ateFederal n,ome Ta= @e#ateEqual 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% $,650

!la" "ax of 20# per week (ropor"io%al Tax)!la" "ax of 20# per week (ropor"io%al Tax) Income Amount of Tax Amount to live on

$200 $0 $160

$350 $&0 $2'0 $500 $100 $00 $1,000 $200 $'00 $5,000 $1,000 $,000

81



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This is our ,urrent s.stem- s it fair&

The )rogressive ta= s.stem is the most

effe,tive 3a. to fight this market

failure


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The Laffer (urve

$ho3s relationshi) #et3een ta= rate

and ta= revenue-

What 3ould ha))en if the highest ta=#ra,ket 3as I+E&

83

The L!$T mi,ro gra)h to

learnJJJJ

T?Q R> ?@JJJJJJ


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What 3as his grou)5s name&Merr. Men

What did the. do&Laugh a lot A the. 3ere Laffers-H

What 3as his 3ea)on of ,hoi,e&>o3 and !rro3

What did Ro#in ?ood do&$teal from the ri,h and give to the )oor-

What 3ould ha))en to the amount of travelers

through $her3ood Forest if he took +Einstead of E of their mone.&

What 3ould ha))en to the total amount of

mone. he ,olle,ts& 84

The Laffer (urve


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The Laffer (urve

85

E Ta=

Rate

Ta= Revenue

f the government

in,rease ta=es ratesta= revenue 3ill

in,rease

f the ta= rate#e,omes too high4 ta=

revenue 3ill fall sin,e

3orkers have no

in,entive to 3ork

harder

GR7!T 7W$


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GR7!T 7W$A

U !R7 @7 WT?M(RJJJJ

86


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"ra,ti,e FROs

87


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882005, #2


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AP Micro 6-6 Summary V2

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Transcript of AP Micro 6-6 Summary V2