4 - 1 unit 4 market failure and the role of the government honors economics
TRANSCRIPT
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Unit 4
Unit 4
Market Failureand the Role
of theGovernment
Honors Economics
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ADAM SMITH
Wealth is Material Goods, not Gold
-The Wealth of Nations1776
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FREEDOM OF CHOICE
MARKETS
NOGOVERNMENT
INTERFERENCE
COMPETITION
Smith’s Free Market
PRIVATEPROPERTY
SELF-INTEREST
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Other Characteristics
•Specialization and Trade•Capital Investment•Use of Money
Smith’s Free Market
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The Case for the Market System
EfficiencyGrowth
Freedom
THE INVISIBLE HAND
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Karl Marx
Market Failures
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The world praises the individual who makes the most people happy.
-Das Kapital1867
Karl Marx
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The Situation in 1868• Workers - including women and children as
young as 4 - spent 14 hours a day, 6 days a week on the job
• factory work was unsanitary and unsafe with no guarantee of compensation for injury or illness
• 80% of factory workers lived in poverty huddled in ghettos and tenements
• business cycles made workers the victims of either high inflation or high unemployment
• the richest 1% owned over 90% of total wealth
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Wealth is Utility, not Material Goods.
-Das Kapital1867
Karl Marx
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• All wealth is a direct result of combining Labor with the other Tools of Production
LABOR THEORY OF VALUELABOR THEORY OF VALUE
• The concept of Private Property has separated the worker from access to the other Means of Production
ALIENATIONALIENATION
Scientific Socialism
EXPLOITATIONEXPLOITATION• Private Ownership allows the Capitalist to seize the
Surplus Labor Value of the worker as Profit by paying Subsistence Wages
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•Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $331,000,000.00
•The daily cost for running Walt Disney World is about $259,000 a day; that’s $94,534,000 a year.
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•Disney World was completed in 1973 the final cost of construction, land, material, display and other expenses is estimated at $331,000,000.00
•The daily cost for running Walt Disney World is about $259,000 a day; that’s $94,534,000 a year.
In the final year before he was fired as CEO of the Disney Corporation,
Michael Eisner was given a bonus of
$202,000,000.
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QUESTION:
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If Michael Eisner didn’t show up for work this Saturday, could you still go to Disney
World?
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If all the employees didn’t show up for work this
Saturday, could you still go to Disney World ?
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BUSINESSCYCLES
IMPERFECTCOMPETITION
PUBLICGOODS
ASYMMETRICINFORMATION
Marx’s Market Failures
INEQUITY
EXTERNALITIES
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Marx’s Market Failures
BUSINESSCYCLES •SEASONAL CYCLES
•36 MONTH CYCLES•10 YEAR CYCLES
•50 YEAR CYCLES•STRUCTURAL CHANGES IN TECHNOLOGY
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Marx’s Theory of the Business Cycle
Level of
Real O
utp
ut
Time
Peak
Peak
Peak
Recession
Recession
Expansion
Expansion
Trough
Trough
Growth
Trend
Twin Problems of the Business Cycle• Unemployment• Inflation
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0
2
4
6
8
10
12
1965 1970 1975 1980 1985 1990 1995 2000 2005
Three Facts About Economic Fluctuations
As output falls, unemployment rises.As output falls, unemployment rises.
Unemployment rate, percent of labor forceUnemployment rate, percent of labor force
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An Interesting Aside About Economic Fluctuations
Some Economists believe Technological Cycles have become shorter.
Some Economists believe Technological Cycles have become shorter.
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Marx’s Market Failures
IMPERFECTCOMPETITION
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Marx’s Market Failures
ASYMETRICINFORMATION
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Marx’s Market Failures
EXTERNALITIES
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Fig. 26.1 top
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Marx’s Market Failures
INEQUITY
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• 2007 US Family Income Shares before Taxes and Transfers: – Lowest 5th = 1%– Second 5th = 7%– Middle 5th = 14%– Second highest 5th = 23%– Highest 5th = 55%
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• 2007 US Family Income Shares after Taxes and Transfers: – Lowest 5th = 5%– Second 5th = 10%– Middle 5th = 16%– Second highest 5th = 23%– Highest 5th = 46%
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BUSINESSCYCLES
IMPERFECTCOMPETITION
PUBLICGOODS
ASYMMETRICINFORMATION
Marx’s Market Failures
INEQUITY
EXTERNALITIES
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Alternatives Considered #1
REVOLUTION
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Alternatives Considered #2
Unions
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Alternatives Considered #3
government
intervention
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SOCIALISM• GOVERNMENT BY DIRECT POPULAR VOTE
• PUBLIC OWNERSHIP OF THE MEANS OF PRODUCTION– COMMUNICATION
– TRANSPORTATION
– FINANCE
– EDUCATION
– HEALTH CARE
• PROGRESSIVE INCOME TAX
• REDISTRIBUTION OF INCOME
• CREATION OF A SOCIAL WELFARE SAFETY NET
• ELIMINATION OF DISCRIMINATION