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THE PROBLEM OF INFORMALITY: In a Nutshell INFORMAL ECONOMY FORMAL ECONOMY Comprised of Extra-Legal Firms Comprised of Law-Abiding Firms Not Registered: Firms not licensed or registered as a legitimate entity. Did not incur expense of time, energy and money setting up business. Registered: Firms played by the rules. Spent time, resources and money obtaining the necessary licenses, permits, etc. to operate within the letter of the law. Pay No Taxes : Firms not registered with government are off the government’s “radar screen”. Government has no idea where the business is located; how the business operates, how much revenues it generates, its costs & profits. Poor ‘information-gathering system’ prevents government from assessing its tax liability. Governments don’t even try to tax these firms. Pay Taxes : Since firms are registered with the government, firms’ accounting records are accessible. Firms’ tax liability is easy to assess. Firms therefore pay taxes. Doesn’t play by the rules . Ignores all regulations & commercial / business laws. Plays by the rules : Firms must adhere to: 1. Labor laws: pay government-imposed minimum wages, benefits to employees. 2. Procurement laws: must avoid sourcing materials & supplies from non-licensed, unauthorized vendors who tend to be lower cost providers. Must buy from authorized vendors who tend to be higher cost providers. 3. Environmental laws: run risk of incurring a fine if caught polluting environment or if caught using banned materials. 4. Product safety standards: Must be adhered to or run risk of incurring a fine. 5. Workplace safety rules: If employee is injured, employer is liable. If caught breaking any of the above rules, firms are assessed a heavy fine. In light of the above, these firms are LOW COST PRODUCERS . In light of the above, these firms have substantial costs. Hence, are HIGHER COST PRODUCERS . Lower Costs → Lower Retail Prices Higher Costs → Higher Retail Prices
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Lower Prices → ↑ Market Shares Informal sector grows New jobs emerge in this sector…… However…. The jobs pay less than minimum Workers remain “poor” & vulnerable if become
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This note was uploaded on 11/10/2011 for the course ECON 4310 taught by Professor Staff during the Fall '08 term at Kennesaw.

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