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,
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.
Federal – Revenue from income and social security taxes. Largest expenditure is income
Roles of government:
1. Correcting for externalities. 2. Providing public goods.
3. Providing a fair distribution of income. 4. Merit goods.
Margainal – additional.
between buyers and sellers (2 parties).
Social- includes buyers and
sellers and a 3
Externality: A cost or benefit that is passed on to third parties outside the activity
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
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