Economic institutions

Economic Institutions
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Unformatted text preview: 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 persons 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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