Post on 25-Dec-2015
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Introduction to Economics
Distribution of Income
Public Goods
Http://www.econ.ucsb.edu
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Two Basic Perspectives in Economics
• Efficiency– competitive markets insure that consumers pay
a price for goods and services equal to their marginal cost of production
– On the frontier versus within production possibility frontier
• Equity– should goods and services go to those who can
afford them?– Should one dollar = one vote?
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SMCISMCII
Quantity
MC, ,ATC
Optimal Size of the Firm: Constant Returns to Scale
If market price is above long run marginal cost, the firm willmake the same excess profit per unit of output in a large plant as in a small plant. The firm may prefer larger to smaller. As long as firms are making excess profits, other firms will enter the industry,increasing supply, and driving price down to LMC. Lecture 14
SATCISATCII
LATC, LMCpM
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Inefficient use of Labor, Land and Capital
Agriculture
Manufacturingetc. (Non-Ag) Production Possibility
Frontier: Real GDP
Fig. 1.1 in text
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Is an Efficient Economy the Same as a Decent Society?
• Is a meritocracy fair?
• Our society and American economists tend to focus more on efficiency
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http://www.worldbank.org/depweb/
Income Inequality Across the World
Lab 7, Ch. 23, Internet Exercises, World Bank Links
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How Do Countries Like Sweden Attain Low Gini Coefficients,( More Equity)?
• Government taxes citizens and redistributes income
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Lab 7, Ch. 23, Internet Exercises,
“Taking a Look at the Level of Economic Development and Well-Being in Countries Around the World”
Link to Handbook of InternationalEconomic Statistics
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Income Inequality: Brazil Versus Hungary
World Bank Development Education ProgramBeyond Economic Growth, Online Student Book
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Lorenz Curves for Hungary and Brazil
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Poverty Around the World
Population living on lessthan $1 per day
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World Distribution of People Living on Less Than $1 Per Day
Beyond Economic Growth, Online Student Book
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Poverty in the USPoverty in the US• US Government Definition of Poverty
– Subsistence wage: $17603 in 2000• a non-farm family of four
• cost of inexpensive but nutritious food times 3– assume food is 1/3 of budget
• Trends in Poverty
• Incidence of Poverty– elderly– children/families headed by single women– rural
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Poverty in the United States
• Economic Issues
• Political Issues
• Social Issues– changing behaviors– marriage trends– divorce trends– births out of wedlock
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Poverty Trends: 1959-2000
Lab10: Children, Poverty, and Politics: US Census Bureau: Poverty in the United States: 2000
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Poverty and Female Heads of Households
Lab10: Children, Poverty, and Politics: US Census Bureau: Poverty in the United States: 2000
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Poverty and Youth
Lab 10: Children, Poverty, and Politics
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Child Poverty
Lab 10: Children, Poverty and Politics: “ChildPoverty in the States ….”
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Percentage of Births Occuring Out of Wedlock, . White Women by Age Group, US .
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Percentage of Births Occurring Out of Wedlock, . Black Mothers By Age Group, US
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US Families Headed By Women in Percent .
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Marriage and Divorce Rates Per 1000 Population, US .
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US Marrige Rates Per 1000 Population, . Unmarried Women 15-44 Years Old
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Summary-Vocabulary-ConceptsSummary-Vocabulary-Concepts• input factor shares• distribution of
personal income• distribution of family
income• frequency distribution
of income• cumulative
distribution of income• Lorenz curve• Gini coefficient• median family income
• part-time, part-year worker
• full-time, full-year worker
• within group variation in earnings
• ability differential• between group
variation in earnings• education differential• experience differential• definition of poverty
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Public Goods
• Domestic Tranquility: The protection of life, liberty and property (role for government)
• Safety– safe air– safe water– safe food– safe transportation: highwaymen & pirates– safe communications
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Domestic Safety
• Control of Crime (control of pollution)
• Air travel: the history of skyjacking
• The incidence of robbery and burglary– the burden of the poor– economic notion of public goods
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Social Control of Problems
• Pollution
• Crime
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Propositions
• People would like zero pollution and zero crime
• Society can not achieve zero levels of these “bads” because of diminishing returns to abatement activities
• People are reluctant to give up consumption and pay more taxes for safety from pollution and crime
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Crime Control or Pollution Abatement
Offenses(Pollution)
Arrests
(Cleanup)
Where does crime (pollution) comefrom? It is generated by the economic,social and political processes associatedwith growth.
Supply of Offenses
Diminishing returns principle
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Expenditure on Enforcement (Pollution Abatement)
ControlExpenditure
Cost in $
Arrests (Cleanup)
Assume costs of control areproportional to the level of abatement activity.
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Budget Constraint: GDP = Control Expenditures + Consumption
ControlExpenditures
Consumption
The opportunity cost of controlling crimeor cleaning up pollutionis less consumption, for a given level of GDP(scarcity principle).
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
Abatement Cost
Arrests
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
Abatement Cost
Supply of Offenses (pollution)
Arrests
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
Abatement Cost
Arrests
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
Abatement Cost
Arrests
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Synthesis: the Crime (pollution)Problem-Consumption Tradeoff
Expenditure on Control
Consumption
Budget Constraint
Offenses (pollution)
Abatement Cost
Arrests
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Crime (pollution) - Consumption Possibility Frontier
Consumption: good
Offenses (pollution): bad
The first step of the paradigm: the options for choice
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Reality Check About Bads
• People would like zero bads: not possible
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Crime (pollution) - Consumption Possibility Frontier
Consumption: good
Offenses (pollution): bad
The first step of the paradigm: the options for choice
Minimum possible
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Reality Check About Bads
• People would like zero bads: not possible
• People don’t want to bear the costs of controlling bads: creates a problem for politicians– people demand less crime and less pollution,
but do not want higher taxes– opportunity cost of less crime and less pollution
gets higher and higher
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Crime (pollution) - Consumption Possibility Frontier
Consumption: good
Offenses (pollution): bad
The first step of the paradigm: the options for choice
Opportunity cost ofless crime
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Community Values Confront Reality:Crime (pollution) - Consumption Possibility Frontier
Consumption: good
Offenses (pollution): bad
The second step of the paradigm: pricing the options
Community preferences
Community wishlist
Whose community (social)values? The pharoah’s, the king’s, the peoples’?
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Community Values Confront Reality:Crime (pollution) - Consumption Possibility Frontier
Consumption: good
Offenses (pollution): bad
The third step of the paradigm: choosing the best option
Community preferencesFeasible options
Best option givencommunity preferences
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Pollution Control Expenditures as a % of GDP
Lab 7, Ch. 23, Internet Exercises, “Taking a Look at …”,Handbookof International Economic Statistics”
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Growth Versus the Environment
• Ironically, while much pollution is associated with growth, it is the developed countries that can afford to clean up their environment, as the previous slide shows.
• The developing countries create a fair amount of pollution, but have so many pressing needs that cleaning up pollution tends to get a lower priority
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Brief History of Skyjacking• Skyjackings Abroad: many motivated by
terrorism and politics, especially in the 60’s, 70’s and 80’s.
• Skyjackings in the US: Only one was politically motivated
• Yet US Skyjackings appear to be linked to foreign skyjackings
• Efforts to deter skyjackings by screening passengers helps but does not solve the problem (US Civil Aviation Act of 1973)
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Skyjackings
• The first skyjacking was a Peruvian carrier in February 1931
• The first skyjacking of a US carrier was a National Airlines flight destined for Key West Florida on May 1, 1961
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Skyjackings Involving US Civil Aviation .
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The Legend of D. B. CooperThe Legend of D. B. Cooper
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US Response to Domestic Skyjackings
• Armed Federal Marshals on Flights– mostly on flights on the Eastern seaboard
corridor
• Congress Passes the US Civil Aviation Security Program in 1973
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Airline Passengers Screened, in Millions, US .
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Firearms Detected From Screening Airline Passengers, US .
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Explosive Devices Detected From Screening Airline Passengers .
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Skyjackings: Foreign and Domestic .
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US Versus Foreign Skyjackings .
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Domestic Vs. Foreign Skyjackings and the Security Act of '73 .
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Terrorism
Foreign Skyjackings
USSkyjackings
Model of US Skyjackings and Bomb Threats
Bomb Threatsto US Aircraft Inspection
2 Year Lag
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Bomb Threats to US Aircraft .
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Bomb Threats To US Aircraft Vs. Foreign Skyjackings (Lagged Two Years) .
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Bomb Threats
Fitted
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Recent History of US TerrorismPrior to September 11, 2001
• Bombings– World Trade Center, New York– Murtaugh Federal Building, Oklahoma City– Black Churches
http://www.state.gov/s/ct/rls/pgtrpt/2001/
http://www.state.gov/s/ct/rls/pgtrpt/2001/html/10273.htm
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http://www.state.govhttp://www.state.govOffice of the CoordinatorOffice of the Coordinatorfor Counter-Terrorismfor Counter-TerrorismPatterns of Global TerrorismPatterns of Global Terrorism
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Actual and Attempted Bombings in the US .
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Casualties from Bombings, US .
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The Burden of Crime by Income Group
• Burden is on the poor
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Victimization Rates by Income ClassVictimization Rates by Income Class
Income Class Burglary Rate* RobberyRate†
-$7500 86 97,500-9,999 60 7
10,000-14,999 67 515,000-24,999 59 525,000-29,999 54 530,000-49,999 58 4
50,000- 56 3 * Per 1000 Households † Per 1,000 Persons
Source: Report to the Nation on Crime and Justice, Second edition
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Lorenz Curves For Robbery and Burglary Victims .
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BurglaryRobberyEqual
Robbery
Burglary
equality
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Why is Robbery More Unequal Than Burglary?
• Protection from burglary may be more of a private good– buy locks, dogs, security alarms and
surveilance services
• Protection from robbery may be more of a public good– safe streets
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Public Goods and Private GoodsPublic Goods and Private Goods
• Private Goods– consumption uses them up
• what you eat is not available to nourish others
• Public Goods– consumption does not use them up
• national defense
• safe streets
• educated citizenry
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PublicGoods
Private Goods
Optimal Mix
Too Few Public Goods
Slope of the Production PossibilityFrontier:Marginal Cost of Public Goods÷ Marginal Cost of Private Goods
How Much Government Should There Be?What is the right mix of public goods and private goods?
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Central Government Expenditure as a % of GDP, 1995
http://www.worldbank.org/depweb
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Increase in Private Sector Output between 1990 and 1995, for Countries with a History of Socialism
The Triumph of Capitalism