Economic Institutions - Notes Economic Institutions:...

Economic Institutions
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Notes Economic Institutions: Business - private producing units in our society, responsible for 80% of production. Three primary forms of businesses: Sole proprietorship - 1 owner, most businesses are sole, small, Advantage => less rules & regulations, easier to create, direct control (complete control). Disadvantages: 100% accountability, less resources (funds), unlimited liability, debts. Partnership - 2 or more owners, Advantages => pooling resources, more funds to start up business, shared responsibilities, increases specializations. Disadvantages => difficult to separate, disagreements with partners, causes problems, lazy or crooked partners, unlimited liability. Corporation: large, Walmart or Microsoft. Advantages => easiest time raising funds, can issue corporate stocks and bonds, can get loans, increases productivity, tax reduction, limited liability, sues corporation person in charge. Disadvantages => more likely to get sued, double taxation, only form of business t axed twice, least control by the owner. The relative importance of manufacturing: % of production unchanged, % of jobs has fallen, Reasons – 1. More productive, 2. Import more, 3.service jobs. Government: 1. State and local – employ over 14 million and spend all most one trillion dollars per year. Revenue from property and sales tax. Largest expenditure is education. 2. Federal – Revenue from income and social security taxes. Largest expenditure is income security. Roles of government: 1. Correcting for externalities. 2. Providing public goods. 3. Providing a fair distribution of income. 4. Merit goods. Margainal – additional. Private - between buyers and sellers (2 parties). Social- includes buyers and sellers and a 3 rd party. Externality: A cost or benefit that is passed on to third parties outside the activity or transaction. 1. Negative externality – cost are passed on to third partied. 2. Positive externality – benefits are passed on to third parties. Marginal Private Cost (MPC): The cost of just the people in the transaction, does not include the cost passed on to third parties. Marginal Social Cost (MSC): The total cost to society of producing an additional unit of a good or service, include the cost to third parties. Marginal Private Benefits (MPB): the benefits of just the people in the transaction, does not include the benefits passed on to the third party. Marginal Social Benefits (MSB): the total benefit to society of producing an additional unit of a good or service, includes the benefits to third parties. Public goods: non rival in consumption – one person’s enjoyment of the benefits of a public good does not interfere with anyone else. Non-excludable – once the good is produced on one can be excluded from enjoying its benefits. Free rider problem: Because people can enjoy the benefits of public goods wether they pay for them or not, they are usually unwilling to pay
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