Ebook Economic (10th edition): Part 2

(BQ) Part 2 book Economic has contents: Public choices and public goods, economics of the environment, markets for factors of production, economic inequality, uncertainty and information, monitoring jobs and inflation, economic growth, money, the price level, and inflation, aggregate supply and aggregate demand,...and other contents.

PART FIVE Market Failure and Government After studying this chapter, you will be able to: ᭜ Explain why some choices are public choices and how these choices are made in the political marketplace ᭜ Explain how the free-rider problem arises and how the quantity of public goods is determined ᭜ Explain why mixed goods with external benefits lead to inefficient underproduction and how public production, subsidies, and vouchers can achieve allocative efficiency F ighting a California wildfire, screening passengers at an airport, providing 16 good schools and colleges, defending the nation’s borders and interests around the globe, policing neighborhoods and highways, operating courts and a legal system: Governments are involved in all these activities But why? Why does government provide some goods and services and not others? Why don’t we leave it to private firms to provide and sell all goods and services? Do governments overprovide or underprovide—provide too much or too little? These are the questions we study in this chapter We begin by classifying goods and services and explaining the economic theory of why and how governments intervene in markets, or even replace them We apply this theory to the provision of public services Two such public services are education and health care You will see how the political marketplace provides these services In Reading Between the Lines at the end of the chapter, we look at some of the strengths and weaknesses of the 2010 Affordable Care Act PUBLIC CHOICES AND PUBLIC GOODS 371 372 Chapter 16 Public Choices and Public Goods ◆ Public Choices All economic choices are made by individuals, but some choices are private and some are public A private choice is a decision that has consequences for only the person making it Decisions to buy (demand) or to sell (supply) goods and services in competitive markets are examples of private choices At the market equilibrium price, these choices are consistent and one person’s decision to buy or sell a little bit more or a little bit less has an imperceptible effect on the outcome A public choice is a decision that has consequences for many people and perhaps for an entire society Decisions by political leaders and senior public servants about price and quantity regulations, taxes, international trade policy, and government spending are examples of public choices You studied the consequences of some public choices in Chapter where you saw how price ceilings and price floors prevent voluntary exchanges even though marginal social benefit exceeds marginal social cost; you also saw how taxes drive a wedge between marginal social benefit and marginal social cost In Chapter 7, you saw how tariffs and import quotas restrict international trade All of these public choices result in scarce resources being used inefficiently—they create deadweight loss Why governments things that create inefficiency? Aren’t they supposed to make things better? If governments make things worse, why they exist? Why aren’t the successful societies those that have no government? The economic theory of government explains both why governments exist and why they a less-than-perfect job Why Governments Exist Governments exist for three major reasons First, they establish and maintain property rights Second, they provide nonmarket mechanisms for allocating scarce resources Third, they implement arrangements that redistribute income and wealth Property rights are the fundamental foundation of the market economy By establishing property rights and the legal system that enforces them, governments enable markets to function In many situations, markets function well and allocate scarce resources efficiently But sometimes the market results in inefficiency—market failure (see Chapter 5, pp 114–115) When market failure occurs, too many of some things and too few of some other things are produced Choices made in the pursuit of self-interest have not served the social interest By reallocating resources, it is possible to make some people better off while making no one worse off The market economy also delivers a distribution of income and wealth that most people regard as unfair Equity requires some redistribution Replacing markets with government resourceallocation decisions is no simple matter Just as there can be market failure, there can also be government failure Government failure is a situation in which government actions lead to inefficiency—to either underprovision or overprovision Government failure can arise because government is made up of many individuals, each with their own economic objectives Public choices are the outcome of the choices made by these individuals To analyse these choices, economists have developed a public choice theory of the political marketplace Public Choice and the Political Marketplace Four groups of decision makers, shown in Fig 16.1, interact in the political marketplace They are ■ ■ ■ ■ Voters Firms Politicians Bureaucrats Voters Voters evaluate politicians’ policy proposals, benefit from public goods and services, and pay some of the taxes In the economic model of public choice, voters support the politicians whose policy proposals make them better off and express their demand for public goods and services by voting, helping in political campaigns, lobbying, and making campaign contributions Firms Firms also evaluate politicians’ policy propos- als, benefit from public goods and services, and pay some of the taxes Although firms don’t vote, they make campaign contributions and are a major source of funds for political parties Firms also engage in lobbying activity to persuade politicians to propose policies that benefit them Politicians Politicians are the elected persons in the federal, state, and local governments—from the President of the United States to the Superintendent Public Choice FIGURE 16.1 373 The Political Marketplace DEMAND Taxes VOTERS FIRMS Votes, campaign funds, lobbying Policy proposals POLITICIANS Voters express their demand for policies with their votes Voters and firms express their demand for policies with campaign contributions and by lobbying Politicians express their supply of policies with proposals that they hope will attract enough votes to get them elected and keep them in office Politicians also set the taxes paid by voters and firms Bureaucrats provide public goods and services and try to get the largest possible budget for their departments A political equilibrium balances all these public choices BUREAUCRATS Public goods and services SUPPLY animation of Yuma, Arizona, School District One Federal and state politicians form coalitions—political parties— to develop policy proposals, which they present to voters in the hope of attracting majority support Politicians also direct bureaucrats in the delivery of public goods and services and other policy actions The goal of a politician is to get elected and to remain in office Votes, to a politician, are like profit to a firm Bureaucrats Bureaucrats are the public servants who work in government departments They administer tax collection, the delivery of public goods and services, and the administration of rules and regulations The self-interest of a bureaucrat is best served when the budget of her or his department is maximized The bigger the budget of a department, the greater is the prestige of its chief and the greater are the opportunities for promotion for people further down the bureaucratic ladder So all the members of a department have an interest in maximizing the department’s budget This economic assumption does not imply that bureaucrats a poor job Rather it implies that, in doing what they perceive to be a good job, they take care of their own self-interest too Political Equilibrium Voters, firms, politicians, and bureaucrats make their economic choices to achieve their own self-interest Public choices, like private choices, are constrained by what is feasible Each person’s public choices are also constrained by the public choices of others The balance of forces in the political marketplace determines the outcome of all the public choices that people make In a political equilibrium the choices of voters, firms, politicians, and bureaucrats are all compatible and no group can see a way of improving its position by making a different choice Ideally, the political equilibrium will achieve allocative efficiency and serve the social interest, but such an outcome is not guaranteed, as you’ll see later in this chapter We make public choices because some situations just don’t permit private choices The core of the reason we can’t always make private choices is that some goods and services (and some factors of production) have a public nature—they are public goods and services Your next task is to see exactly what we mean by a public good or service 374 Chapter 16 Public Choices and Public Goods What is a Public Good? To see what makes a good a public good, we distinguish two features of all goods: the extent to which people can be excluded from consuming them and the extent to which one person’s consumption rivals the consumption of others FIGURE 16.2 Private goods Rival Excludable A good is excludable if it is possible to prevent someone from enjoying its benefits Brink’s security services, East Point Seafood’s fish, and a U2 concert are examples People must pay to benefit from them A good is nonexcludable if it is impossible (or extremely costly) to prevent anyone from benefiting from it The services of the LAPD, fish in the Pacific Ocean, and a concert on network television are examples When an LAPD cruiser enforces the speed limit, everyone on the highway benefits; anyone with a boat can fish in the ocean; and anyone with a TV can watch a network broadcast Rival A good is rival if one person’s use of it decreases the quantity available for someone else A Brink’s truck can’t deliver cash to two banks at the same time A fish can be consumed only once A good is nonrival if one person’s use of it does not decrease the quantity available for someone else The services of the LAPD and a concert on network television are nonrival One person’s benefit doesn’t lower the benefit of others A Fourfold Classification Figure 16.2 classifies goods, services, and resources into four types Private Goods A private good is both rival and excludable A can of Coke and a fish on East Point Seafood’s farm are examples of private goods Public Goods A public good is both nonrival and nonexcludable A public good simultaneously benefits everyone, and no one can be excluded from its benefits National defense is the best example of a public good Common Resources A common resource is rival and nonexcludable A unit of a common resource can be used only once, but no one can be prevented from using what is available Ocean fish are a common resource They are rival because a fish taken by one person isn’t available for anyone else, and they are Fourfold Classification of Goods Food and drink Fish in ocean Car Atmosphere House National parks Natural monopoly goods Nonrival Common resources Public goods Internet National defense Cable television The law Bridge or tunnel Air traffic control Excludable Nonexcludable A private good is one for which consumption is rival and from which consumers can be excluded A public good is one for which consumption is nonrival and from which it is impossible to exclude a consumer A common resource is one that is rival but nonexcludable A good that is nonrival but excludable is produced by a natural monopoly animation nonexcludable because it is difficult to prevent people from catching them Natural Monopoly Goods A natural monopoly good is nonrival and excludable When buyers can be excluded if they don’t pay but the good is nonrival, marginal cost is zero The fixed cost of producing such a good is usually high so economies of scale exist over the entire range of output for which there is a demand (see p 300) An iTunes song and cable television are examples of natural monopoly goods Mixed Goods and Externalities Some goods don’t fit neatly into the four-fold classification of Fig 16.2 They are mixed goods A mixed good is a private good the production or consumption of which creates an externality An externality is a cost (external cost) or a benefit (external benefit) that arises from the production or consumption of a private good and that falls on someone other than its producer or consumer A negative externality imposes a cost and a positive externality provides a benefit We’ll look at some examples of mixed goods with externalities and study those with positive externalities later in this chapter and those with negative externalities in Chapter 17 Public Choices 375 Economics in Action Is a Lighthouse a Public Good? Built on Little Brewster Island in 1716 to guide ships into and out of the Boston Harbor, Boston Lighthouse was the first light station in North America For two centuries, economists used the lighthouse as an example of a public good No one can be prevented from seeing its warning light—nonexcludable—and one person seeing its light doesn’t prevent someone else from doing so too—nonrival Ronald Coase, who won the 1991 Nobel Prize for ideas he first developed when he was an undergraduate at the London School of Economics, discovered that before the nineteenth century, lighthouses in England were built and operated by private corporations that earned profits by charging tolls on ships docking at nearby ports A ship that refused to pay the lighthouse toll was excluded from the port So the benefit arising from the services of a lighthouse is excludable Because the services provided by a lighthouse are nonrival but excludable, a lighthouse is an example of a natural monopoly good and not a public good Mixed Goods with External Benefits Two of the things that have the greatest impact on your welfare, your education and health care, are mixed goods with external benefits Think about a flu vaccination It is excludable because it would be possible to sell vaccinations and exclude those not willing to pay from benefiting from them A flu vaccination is also rival because providing one person with a vaccination means one fewer available for everyone else A flu vaccination is a private good, but it creates an externality If you decide to get a flu vaccination, you benefit from a lower risk of getting infected in the coming flu season But if you avoid the flu, your neighbor who didn’t get vaccinated has a better chance of avoiding it too A flu vaccination brings a benefit to others, so it is a mixed good with an external benefit The external benefit of a flu vaccination is like a public good It is nonexcludable because everyone with whom you come into contact benefits You can’t selectively benefit only your friends! And it is nonrival—protecting one person from the flu does not diminish the protection for others Your education is another example of a mixed good with external benefits If all education was organized by private schools and universities, those not willing or able to pay would be excluded, and one person’s place in a class would rival another’s So education is a private good But your being educated brings benefits to others It brings benefits to your friends who enjoy your sharp, educated wit and it brings benefits to the community in which you live because well-educated people with a strong sense of fellowship and responsibility toward others make good neighbors These external benefits are like a public good You can’t selectively decide who benefits from your good neighborliness and one person’s enjoyment of your good behavior doesn’t rival someone else’s So education is a mixed good with an external benefit Mixed Goods with External Costs Mixed goods with external costs have become a huge political issue in recent years The main ones are electricity and transportation (road, rail, and air) produced by burning hydrocarbon fuels—coal, oil, and natural gas 376 Chapter 16 Public Choices and Public Goods Electricity and transportation are excludable and rival—they are private goods But when you use electricity or travel by car, bus, train, or airplane, carbon dioxide and other chemicals pour into the atmosphere This consequence of consuming a private good creates an external cost and is a public bad (A “bad” is the opposite of a good.) No one can be excluded from bearing the external cost and one person’s discomfort doesn’t rival another’s Electricity and transportation are mixed goods with external costs Other private goods that generate external costs include logging and the clearing of forests, which destroy the habitat of wildlife and influence the amount of carbon dioxide in the atmosphere; smoking cigarettes in a confined space, which imposes a health risk on others; and driving under the influence of alcohol, which increases the risk of accident and injury for others Inefficiencies that Require Public Choices Public goods, mixed goods, common resources, and natural monopoly goods all create inefficiency problems that require public choices Public choices must be made to ■ ■ ■ Provide public goods and mixed goods Conserve common resources Regulate natural monopoly Provide Public Goods and Mixed Goods Because no one can be excluded from enjoying the benefits of a public good, no one has an incentive to pay for their share of it Even people with a social conscience have no incentive to pay because one person’s enjoyment of a public good doesn’t lower the enjoyment of others—it is nonrival If private firms tried to produce and sell public goods to consumers, they wouldn’t remain in business for very long The market economy would fail to deliver the efficient quantity of those goods For example, there would be too little national defense, police services and law enforcement, courts and judges, storm-water and sewage disposal services Mixed goods pose a less extreme problem The market economy would underprovide mixed goods with external benefits because their producers and consumers don’t take the external benefits into account when they make their own choices The market economy would overprovide mixed goods with external costs because their producers and consumers don’t take the external costs into account when they make their own choices Conserve Common Resources Because no one can be excluded from enjoying the benefits of a common resource, no one has an incentive to pay for their share of it or to conserve it for future enjoyment If boat owners are left to catch as much Southern Bluefin tuna as they wish, the stock will deplete and eventually the species will vanish The market economy would overproduce tuna while stocks lasted and then underproduce as stocks ran out This problem, called the tragedy of the commons, requires public choices to limit the overuse and eventual destruction of common resources Regulate Natural Monopoly When people can be excluded from enjoying the benefits of a good if they don’t pay for it, and when the good is nonrival, the marginal cost of producing it is zero A natural monopoly can produce such a good at the lowest cost But as Chapter 13 explains, when one firm serves a market, that firm maximizes profit by producing too little of the good You studied the regulation of natural monopoly in Chapter 13 This chapter and the next one study the other two public choices that must be made In this chapter, we’ll focus on the underprovision of public goods and mixed goods with external benefits Chapter 17 studies mixed goods with external costs and conserving common resources REVIEW QUIZ List three main reasons why governments exist Describe the political marketplace Who demands, who supplies, and what is the political equilibrium? Distinguish among public goods, private goods, common resources, natural monopoly goods, and mixed goods What are the problems that arise from public goods, common resources, natural monopoly goods, and mixed goods? You can work these questions in Study Plan 16.1 and get instant feedback Providing Public Goods Why governments provide firefighting services? Why don’t the people of California buy brush firefighting services from Firestorm, a private firm that competes for our dollars in the marketplace in the same way that McDonalds does? The answer is that firefighting is a public good It is nonexcludable and nonrival and it has a free-rider problem Benefits of a Public Good FIGURE 16.3 Marginal benefit (dollars per airplane) ◆ Providing Public Goods 377 80 60 40 20 MB L The Free-Rider Problem Marginal Social Benefit from a Public Good Lisa and Max (the only people in a society) value fire-fighting airplanes Figure 16.3(a) and 16.3(b) graph their marginal benefits from the airplanes as MBL for Lisa and MBM for Max The marginal benefit from a public good (like that from a private good) diminishes as the quantity of the good increases Figure 16.3(c) shows the marginal social benefit curve, MSB Because everyone gets the same quantity of a public good, its marginal social benefit curve is the sum of the marginal benefits of all the individuals at each quantity—it is the vertical sum of the individual marginal benefit curves So the curve MSB is the marginal social benefit curve for the economy made up of Lisa and Max For each airplane, Lisa’s marginal benefit is added to Max’s marginal benefit Contrast the MSB curve for a public good with that of a private good To obtain the economy’s MSB curve for a private good, we sum the quantities demanded by all the individuals at each price—we sum the individual marginal benefit curves horizontally (see Chapter 5, p 108) Quantity (number of airplanes) Marginal benefit (dollars per airplane) (a) Lisa's marginal benefit 60 40 20 MB M Quantity (number of airplanes) (b) Max's marginal benefit Marginal benefit (dollars per airplane) A free rider enjoys the benefits of a good or service without paying for it Because a public good is provided for everyone to use and no one can be excluded from its benefits, no one has an incentive to pay his or her share of the cost Everyone has an incentive to free ride The free-rider problem is that the economy would provide an inefficiently small quantity of a public good Marginal social benefit from the public good would exceed its marginal social cost and a deadweight loss would arise Let’s look at the marginal social benefit and marginal social cost of a public good 140 120 100 80 60 Lisa 40 Max 20 MSB Quantity (number of airplanes) (c) Economy’s marginal social benefit The marginal social benefit at each quantity of the public good is the sum of the marginal benefits of all individuals The marginal benefit curves are MBL for Lisa and MBM for Max The economy’s marginal social benefit curve is MSB animation Chapter 16 Public Choices and Public Goods Marginal Social Cost of a Public Good The marginal social cost of a public good is determined in exactly the same way as that of a private good—see Chapter 5, p 110 The principle of increasing marginal cost applies to the marginal cost of a public good, so the marginal social cost decreases as the quantity of the public good increases Efficient Quantity of a Public Good To determine the efficient quantity of a public good, we use the principles that you learned in Chapter The efficient quantity is that at which marginal social benefit equals marginal social cost Figure 16.4 shows the marginal social benefit curve, MSB, and the marginal social cost curve, MSC, for firefighting airplanes (We’ll now think of society as consisting of Lisa and Max and the other 39 million Californians.) If marginal social benefit exceeds marginal social cost, as it does with airplanes, resources can be used more efficiently by increasing the number of airplanes The extra benefit exceeds the extra cost If marginal social cost exceeds marginal social benefit, as it does with airplanes, resources can be used more efficiently by decreasing the number of airplanes The cost saving exceeds the loss of benefit If marginal social benefit equals marginal social cost, as it does with airplanes, resources are allocated efficiently Resources cannot be used more efficiently because to provide more than airplanes increases cost by more than the extra benefit, and to provide fewer airplanes lowers the benefit by more than the cost saving Inefficient Private Provision Could a private firm—Firestorm—deliver the efficient quantity of firefighting airplanes? Most likely it couldn’t, because no one would have an incentive to buy his or her share of the airplanes Everyone would reason as follows: The number of airplanes provided by Firestorm is not affected by my decision to pay my share or not But my own private consumption will be greater if I free ride and not pay my share of the cost of the airplanes If I don’t pay, I enjoy the same level of fire protection and I can buy more private goods I will spend my money on private goods and free ride on fire protection Such reasoning is the free-rider problem If FIGURE 16.4 Marginal cost and marginal benefit (millions of dollars per airplane) 378 The Efficient Quantity of a Public Good 4.0 MSC MSC = MSB 3.0 MSB > MSC MSC > MSB 2.5 2.0 MSB 1.0 Private underprovision Efficient quantity Quantity (number of airplanes) With fewer than airplanes, marginal social benefit, MSB, exceeds marginal social cost, MSC With more than airplanes, MSC exceeds MSB Only with airplanes is MSC equal to MSB and the number of airplanes is efficient animation everyone reasons the same way, Firestorm has no revenue and so provides no airplanes Because the efficient number of airplanes is 3, private provision is inefficient Efficient Public Provision The outcome of the political process might be efficient or inefficient We look first at an efficient outcome There are two political parties: Fears and Hopes They agree on all issues except the number of firefighting airplanes: The Fears want 4, and the Hopes want Both parties want to get elected, so they run a voter survey and discover the marginal social benefit curve of Fig 16.5 They also consult with airplane producers to establish the marginal cost curve The parties then a “what-if ” analysis If the Fears propose airplanes and the Hopes propose 2, the voters will be equally unhappy with both parties Compared to the efficient quantity, the Hopes want an underprovision of airplaneand the Fears want an overprovision of airplane The deadweight losses are equal and the election would be too close to call Providing Public Goods Contemplating this outcome, the Fears realize that they are too fearful to get elected They figure that, if they scale back to airplanes, they will win the election if the Hopes stick with The Hopes reason in a similar way and figure that, if they increase the number of airplanes to 3, they can win the election if the Fears propose So they both propose airplanes The voters are indifferent between the parties, and each party receives 50 percent of the vote But regardless of which party wins the election, airplanes are provided and this quantity is efficient Competition in the political place results in the efficient provision of a public good The Principle of Minimum Differentiation The principle of minimum differentiation is the tendency for competitors (including political parties) to make themselves similar to appeal to the maximum number of clients or voters This principle describes the behavior of political parties It also explains why fastfood restaurants cluster in the same block For example, if Dominoes opens a new pizza outlet, it is likely that Pizza Hut will soon open nearby An Efficient Political Outcome Marginal cost and marginal benefit (millions of dollars per airplane) FIGURE 16.5 4.0 Hopes' preference Fears' preference MSC 3.0 2.5 2.0 MSB 1.0 Efficient quantity Quantity (number of airplanes) The Hopes would like to provide airplanes and the Fears would like to provide airplanes The political outcome is airplanes because unless each party proposes airplanes, the other party will beat it in an election animation 379 Economics in Action Fighting California’s Wildfires During the 2009 wildfire season (July through November), 63 fires burned across more than 500 square miles of California The two largest and deadliest fires, Station Fire north of Los Angeles and La Brea Fire in Santa Barbara County, together consumed almost 400 square miles of land Wildfires are natural and vital for the ecosystem, but some fires are started by human action, and some both human-made and naturally occurring fires burn close to where people live So protection against wildfires is a vital public good Fighting wildfires is an example of a public good that is provided by government and paid for with tax revenues but produced by private firms Firestorm Wildfire Suppression Inc is one such firm Operating from Chico, CA, Firestorm hires and trains firefighters and produces firefighting services to maximize its profit To achieve this goal, the firm must produce firefighting services at the lowest possible cost But if Firestorm (and its competitors) tried to sell their services to each individual home owner in the wildfire regions of California, they wouldn’t get enough revenue to remain in business There would be a free-rider problem The free-rider problem is avoided because the state of California and federal emergency services agencies buy the services of Firestorm—government is the provider of this public good and Firestorm and others are the producers CHAPTER 16 Public Choices and Public Goods For the political process to deliver the efficient outcome, voters must be well informed, evaluate the alternatives, and vote in the election Political parties must be well informed about voter preferences As the next section shows, we can’t expect to achieve this outcome Inefficient Public Overprovision If competition between two political parties is to deliver the efficient quantity of a public good, bureaucrats must cooperate and help to achieve this outcome But bureaucrats might have a different idea and end up frustrating rather than facilitating an efficient outcome Their actions might bring government failure FIGURE 16.6 Marginal cost and marginal benefit (millions of dollars per airplane) 380 Rational Ignorance A principle of the economic analysis of public choices is that it is rational for a voter to be ignorant about an issue unless that issue has a perceptible effect on the voter’s economic welfare Each voter knows that he or she can make virtually no difference to the fire protection policy of the government of California and that it would take an enormous amount of time and effort to become even moderately well informed about alternative fire-protection technologies Rationally uninformed voters enable bureaucrats and special interest groups to overprovide public goods 4.0 Deadweight loss 3.0 MSC Bureaucrats know but voters rationally don't know that MSC > MSB 2.5 2.0 MSB 1.0 Equilibrium overprovision Efficient quantity Objective of Bureaucrats Bureaucrats want to maxi- mize their department’s budget because a bigger budget brings greater status and more power So the Emergency Services Department’s objective is to maximize the budget for firefighting airplanes Figure 16.6 shows the outcome if the bureaucrats are successful in the pursuit of their goal They might try to persuade the politicians that airplanes cost more than the originally budgeted amount; or they might press their position more strongly and argue for more than airplanes In Fig 16.6, the Emergency Services Department persuades the politicians to provide airplanes Why don’t the politicians block the bureaucrats? Won’t overproviding airplanes cost future votes? It will if voters are well informed and know what is best for them But voters might not be well informed, and well-informed interest groups might enable the bureaucrats to achieve their objective and overcome the objections of the politicians Bureaucratic Overprovision Quantity (number of airplanes) Well-informed bureaucrats want to maximize their budget and rationally ignorant voters enable the bureaucrats to go some way toward achieving their goal A public good might be inefficiently overprovided with a deadweight loss animation REVIEW QUIZ What is the free-rider problem? Why free riders make the private provision of a public good inefficient? Under what conditions will competition among politicians for votes result in an efficient provision of a public good? How rationally ignorant voters and budgetmaximizing bureaucrats prevent the political marketplace from delivering the efficient quantity of a public good? Explain why public choices might lead to the overprovision rather than the underprovision of a public good You can work these questions in Study Plan 16.2 and get instant feedback You’ve seen how the political marketplace provides public goods and why it might overprovide them Your next task is to see how the political marketplace provides mixed goods that bring external benefits Index inefficient, 31 manufacturing, opportunity cost of, 228–229 over, 114, 140, 141 pollution and, 396 possibilities for, opportunity cost and, 30–32 principal-agent problem, 234 public, 383 quotas, 139–140, 404 sustainable, 400–401 team, 243 technological change and, 289 technological efficiency and, 231, 254 Production cutbacks, 283 Production efficiency, 31 Production possibilities, opportunity cost and, 30–32 Production possibilities frontier (PPF), 30, 254, 545 marginal cost and, 33 tradeoffs, 30–31 Production quotas, 139, 139–140, 404 Product schedules, 253 Profits, See also Economic profit; Normal profit accounting, 228 colluding to maximize, 347 of corporation, 494 from holding U.S dollars, 620 long run, 327–328 loss minimizing and, 326–327 normal, 229 output for maximizing, 326–327 perfect competition and, 274–275, 280–285 price discrimination influencing, 310 product innovation and maximizing, 330 short-run, 281–282 Progressive income tax, 455 Prohibition, 143 Property, private, 403–404 Property rights, 42, 396, 397, 403–404 intellectual, 550–551 Proportional income tax, 455 Proprietorship, 234–236 Proprietors’ income, 494 Protection, argument against, 163–167 Public choice, 371 inefficiencies that require, 376 political marketplace and, 372–373 theory, 372, 405 Public franchise, 300 Public goods, 115, 374, 554 efficient quantity of, 378 excludable, 375 lighthouses as, 375 marginal social benefit from, 377 marginal social cost of, 378 providing, 376, 377–380 rival, 374 Public overprovision, 380 Public production, 383 Public provision, 378–380 Public schools competition between, 414–415 private schools v., 415 Puma, 324 Purchasing power parity (PPP), 498, 626 Qatar, 162 QE See Quantitative easing Quality change bias, 525 Quantitative easing (QE), 608 Quantity average, price and, 85–86 efficient, of public good, 378 equilibrium, 66 regulations, 114 Quantity demanded, 57, 60–61 Quantity supplied, 62, 64 Quantity theory of money, 606, 606–607 Quigley, John, 487 Quotas import, 109, 160–161, 191, 307, 309–310, 469, 470 ITQs, 404–405 production, 139–140, 404 Ralph Lauren, 329 Rate of return regulation, 314 Rational choice, Rational expectation, 707 Rational ignorance, 380 Rawls, John, 117 Razors (Reading Between the Lines), 360–361 RBC See Real business cycle theory R&D See Research and development Reading Between the Lines AS-AD model, 664 California’s underground economy, 144–145 CEO pay, 458–459 China’s economic growth, 558–559 China tire trade penalties, 168–169 crowding out in global recession, 582–583 dollar and carry trade, 636–637 elasticities of demand and supply for tomatoes, 98–100 Facebook, 244–245 Federal Reserve stimulus policies, 770–771 fuel choices, food crises, and fingerpointing, 44–45 gasoline prices, 74–75 Google, 316–317 government action in labor markets, 144–145 Internet advertising market battles, 244–245 inventories in expansion, 690–691 jobs growth lags recovery, 528–529 money and recovery, 608–609 Obama fiscal policy, 746–747 paperbooks v e-books, 216–217 paramedics and hockey players, 196–197 perfect competition of corn, 292–293 product differentiation, 334–335 razors, 360–361 real GDP in 2010, 502–503 rose market efficiency, 120–121 I-13 shifting inflation-unemployment tradeoff, 716–717 smart meters, 266–267 Web Ads, 244–245 Reagan, Ronald, 716, 737 Real business cycle (RBC) theory, 712, 713–715 criticisms and defenses of, 715 mechanism of, 713 Real exchange rate, 627 Real GDP, 495 actual and planned expenditure and, 677 aggregate demand curve related to, 653 aggregate expenditure two-way link with, 672 aggregate planned expenditure and, 672, 676, 677, 681 aggregate supply and, 648 business cycle, 497 chained-dollar, 504–505 change in quantity demanded, 60–61 consumption as function of, 675 equilibrium, 687–689 fixed price level and, 676–679 growth in world economy, 543–544 HDI, 501 health and life expectancy, 500 inflation and deflation relating to, 522 Keynesian economics and, 676–679 leisure time, 500 limitations of, 499–501 market for, 763, 764–765 money holding and, 602 productivity growth slowdown, 496–497 standard of living, 496, 498 in 2010 forecasts (Reading Between the Lines), 502–503 unemployment over the cycle, 520–521 in U.S., 542, 543, 657 uses and limitations of, 496–497 Real GDP per person, 496, 540 Real income, 205 Real interest rate, 571, 571–572, 761 Real wage rate, 520, 546 Recession, 497 challenges of Fed, 762–763 costs of, 724 crowding out in global (Reading Between the Lines), 582–583 Fed fighting, 763–764 fiscal policy to fight, 654 monetary policy to fight, 654 Recessionary gap, 659, 758 Recognition lag, 745 Redistribution income, 455–457, 522 of surplus, 308 of wealth, 522 Reebok, 324 Reference base period, 523 Regressive income tax, 455 Regulation, 313 See also Deregulation earnings sharing, 315 monopoly, 313–315, 376 of natural monopoly, 313, 314–315, 376 I-14 Index Regulation (continued) price cap, 128, 315 rate of return, 314 Reid, Harry, 654 Relative price, 56, 205 Renewable natural resources, 400–401 Rent, capital, 428 economic, 308 land, 428–429 Rental income, 493–494 Rental markets, 418, 428–429 Rental rate, 228, 418 Rent ceiling, 128, 128–130 Rent seeking, 167, 308 equilibrium, 308, 309 with price discrimination, 312 Rent-v.-buy decision, 428, 434 Repeated duopoly game, 353–354 Required reserve ratio, 599 Resale price maintenance, 357 Research and development (R&D) games, 350–351 to stimulate economic growth, 557 Research in Motion, 334–335 Reservation wage, 422 Reserves, 593 desired, 600 excess, 600 Reserve ratio desired, 600 required, 599 Resources, 228 See also Common resources; Goods and resources; Natural resources; Renewable natural resources allocation methods, 106–107 competition and efficient use of, 289 efficient use of, 33–35 Resource allocation, 56, 106, 107, 522 Restoring American Financial Stability Act of 2010, 569 Ricardo, David, 553, 578, 645 Ricardo-Barro effect, 578 Risk buying and selling, 469–471 credit, 475 decisions in face of, 466–468 default, 475, 574 insurance markets, 476 pool, 594 trading, 470 Risk aversion, 466 Rival, 374 Robinson, Joan, 52 Robinson-Patman Act, 356 Rockefeller, John D., 356, 358 Rodriguez, Alex, Roe v Wade, 225 Romer, Christina, 10, 744, 745 Romer, Paul, 554 Roosevelt, Franklin D., 514 Rose market efficiency (Reading Between the Lines), 120–121 Rosen, Sherwin, 454 Rule of 70, 540, 540–541 Runge, C Ford, 44 Russell, Bertrand, 723 Saez, Emmanuel, 446, 459 Salai-i-Martin, Xavier, 644–646 Samuelson, Paul, 53 Savings, 566, 571 bank, 593 consumption and, 672 income tax influencing, 736 MPS, 674 National, 571 to stimulate economic growth, 556 taxes influencing, 736 wealth and, 566 Saving function, 672, 673 Savings and loan associations (S&L), 593 Scarcity, Scatter diagrams, 14, 14–15 Schick, 341, 360–361 Schmitt-Grohé, Stephanie, 778–780 Schumpeter, Joseph, 643 Screening, 475 Search activity, 128 Securities, 568, 594 Self-interest, 5, 5–7, 194–195, 477 Self-interested actions, Self Sufficiency Program (SSP), 486, 487 Selling costs, 331–332 Separating equilibrium, 475 Sequential entry games, 354–355 7-Up, 359 Seymour, Richard, 417 Shephard, William G., 241 Sherman Act, of 1890, 356, 357, 358 Shoebuy.com, 321 Shoes, 321, 324, 331 Shortages, 67 housing, 128 Water, case study, 118–119 Short run, 252 aggregate demand in, 688 costs, 257–261 economic profit, 282, 326–327 equilibrium, 281, 604, 605 output, price, and profit, 280–282 possible outcomes, 282 profits and losses in, 281–282 supply, 96 Short-run aggregate supply, 649, 650 Short-run macroeconomic equilibrium, 656 Short-run market supply curve, 280 Short-run Phillips curve, 708 Short-run technology constraints, 253–256 average product curve, 255 marginal product curve, 253–254 product curves, 252 product schedules, 252 total product curve, 253 Short-term bill rate, 760 Shutdown decision, 278, 283 Shutdown point, 278 Signal, 332, 478–479 Signaling, with advertising, 332–333, 474, 475 Simon, Julian, 485 Single-price monopoly, 301 competition compared to, 306–309 output and price decision, 302–305 S&L See Savings and loan associations Slope, 20 aggregate expenditure, 682 across arc, 21–22 of curved line, 21–22 of line, 24–24 marginal propensities and, 674 at point, 21 of relationship, 20 of straight line, 20–21 Smart meters (Reading Between the Lines), 266–267 Smart phones See Cell phones; specific phone Smetters, Kent, 738 Smith, Adam, 51, 113, 223, 351, 414, 535, 553, 556, 645 Smoot-Hawley Act, 159 Social benefits, 381–382 See also Marginal Social benefit Social-interest, 5, 5–7, 477 Social interest theory, 313 Social justice, 500 Social networking, 244–245 Social Security, 455, 471, 729, 738–739 Social Security tax, 133, 135, 729, 735 Solow, Robert, 553 Sony, 493 Sony Reader, 216 Specialization, 453 Spending, 740, 741 SSI See Supplementary Security Insurance SSP See Self Sufficiency Program Stabilization policy, 779 Stagflation, 661, 705, 716 Standard of living globally, 498 over time, 496 Standard Oil, 358 Starbucks, 343 Stark, Pete, 406 State of nature, 64 Statistical discrepancy, 494 Statute of Monopolies, of 1624, 550–551 Stern, Nicholas, 398 Stern Review on the Economics of Climate Change (Stern), 398 Stimulus See also Fiscal stimulus automatic, 741 demand, 777 discretionary fiscal, 743–745 Federal Reserve policies (Reading Between the Lines), 770–771 monetary, 767–769 package, 2009, 742 Stock, 568 Stock markets, 568 Store of value, 591 Straight line equations, 24–25 Strategic interdependence, 367 Strategies, 301, 344, 345 Strawberries, 71 Index Structural surplus or deficit, 741 Structural unemployment, 519, 519–521 Sub-prime credit crisis, 476, 767 Subsidies, 114, 139, 140–141, 141, 162, 383 education and, 383 exports, 162 to farmers, 140–141 government, 314 private, 384 Subsidized services, 455–456 Substitutability, degree of, 209–210 Substitute, 59, 89, 209, 300 Substitution bias commodity, 525 outlet, 526 Substitution effect, 57, 210, 214, 423, 653, 685–686 Sumner, Scott, 608 Sunk cost, 252 Supplementary Security Insurance (SSI), 455 Supply, 62 See also Law of supply all possible changes in, 72–73 change in, 64–65, 70 decision time-frame, 252 decrease in, 70, 139–140 expected future prices, 64 foreign exchange market and, 619, 621 increase in, 64, 70, 140, 575 of labor, 546, 547–548, 734–735 of land, 429 law of, 62 marginal analysis and, decision for, 277 marginal cost and, 109–110 minimum price and cost, 110 of money, 604–605, 621 number of suppliers, 64 of oil, 429–430 perfectly elastic, 136 perfectly inelastic, 136 prices of factors of production, 63 prices of related goods produced, 63 schedule, 62 short-run, 96 state of nature, 64 technology, 64 U.S dollar changes in, 624 Supply curve, 62, 63, 76 for labor markets, 423 in output decisions, 279 short-run market, 280 Supply of loanable funds, 573, 573–574 Supply-side effects, 734–737 Surplus, 67, 108, 730 budget, 730 consumer, 109, 191, 307, 309–310, 469, 470 cyclical, 741, 742 government budget, 577 net operating, 493–494 producer, 111, 307, 469 redistribution of, 308 structural, 741 total, 112 Sustainable Fishing Act, 405 Sustainable production, 400–401 Symmetry principle, 118 Talking with Caroline M Hoxby, 414–416 David Card, 486–488 Jagdish Bhagwati, 10, 52–54 Ricardo J Caballero, 724–726 Richard Clarida, 536–538 Stephanie Schmitt-Grohé, 778–780 Steven D Levitt, 224–226 Susan Athey, 176–178 Tom Hubbard, 368–370 Xavier Salai-i-Martin, 644–646 TANF See Temporary Assistance for Needy Households Tariffs, 157 deadweight loss, 158 effects of, 158 revenue, 166 social loss from, 159 t-shirt, 157–158 two-part, 313 TARP See Troubled Asset Relief Program Taxes, 114, 133–138 See also Tax multiplier on buyers, 134, 135 cap-and-trade v., 406–407 corporate income, 729 on drugs, 143 efficiency and, 137–138 elasticity of demand and, 135–136 elasticity of supply and, 136–137 equivalence of, on buyers and sellers, 134–135 on expenditure, 735 fairness and, 138 Laffer curve and, 737 net, 570 payroll, 386 with perfectly elastic demand, 136 with perfectly inelastic demand, 135 personal income, 729 Pigovian, 398 pollution and, 398–399 progressive income, 455 prohibition v., 143 proportional income, 455 regressive income, 455 on sellers, 133–134 Social Security, 133, 135, 729, 735 tax incidence, 133 workers and consumers paying most, 138 Tax incidence, 133 Tax multiplier, 694, 743, 745 Tax revenues, 737, 740–741 Tax wedge, 735 Taylor, John B., 769 Taylor rule, 769, 779, 780 Team production, economies of, 243 Technology, 64, 230 advancing, 286–289 aggregate supply related to, 651 change in, 289 constraints, 230, 280–282 cost curves and, 260–261, 451 I-15 diminishing returns and change in, 553–554 economic inequality and, 451 efficiency, 231 in firms, 230, 252–256, 289 human capital and change in, 451 information-age, 6, 301, 451 labor demand and, 421 labor productivity and advances in, 551–552 short-run constraint of, 253–256 Technological change, 36 Technological efficiency, 231, 254 Telvent DTN, 74 Temperature analogy, 192 Temporary Assistance for Needy Households (TANF), 455, 457 Temporary shutdown decision, 278, 283 Term Auction Credit, 768 Terrorism, 226 Texas A&M University, 133 Thanasoulis, Connie, 478 A Theory of Justice (Rawls), 117 Third World debt crisis, 633 Three sector balances, 635 Thrift institutions, 593 Time elapsed since price change, 90 Tire trade penalties, 168–169 Tomatoes, 98–99 Total cost (TC), 257, 331 Total expenditure, 494 Total fixed cost (TFC), 257 Total product, 253 Total product curve, 254 Total revenue, 88, 274, 302 Total surplus, 112 Total utility, 181 Total variable cost (TVC), 257 Trade See also Cap-and-trade; Fair trade; International trade carry, 636–637 with China, 41, 151, 152 financial international, 631–635 gains and losses from exports, 156 gains and losses from imports, 155–156 gains from, 38, 39–40 net gain from, 155–156 protection in, 163–167 in risk, 470 of services for oil, 152 in U.S., 41 Tradeoff, 8, 777 big, 117, 456–457 along PPF, 30–31 Trade wars, avoiding, 166 Tragedy of the commons, 376, 400, 401–405 Transaction costs, 115, 242, 397 Transfer payments, 729 Trichet, Jean-Claude, 654 Troubled Asset Relief Program (TARP), 768 Trump, Donald, 441 T-shirts, 152, 153, 157–158, 165 Twitter, 227 2009 fiscal stimulus package, 654, 742 I-16 Index Two-part tariff, 313 Tying arrangement, 357–358 U2, 374 UC Energy Institute, 406 Uhlig, Harald, 744, 745 Umbele Foundation, 645 Uncertainty buying and selling risk, 469–471 choice with, 468 decisions in face of, 466–468 expected utility, 467–468 expected wealth, 466 factor markets, inequality, and, 485 information, invisible hand, and, 477 insurance markets, 476 monopoly and, 477 risk aversion, 466 utility of wealth, 466–467 Underground economy, 144–145, 499–500 Underproduction, 113–114 Underprovision, 383, 384 Underutilized labor, 517 Unemployment alternative measures of, 518 benefits, 520 compensation, 455 current population survey, 515 cyclical, 519 employment and, 514–518 frictional, 519 full employment and, 519–521 inflation and, 708–710 inflation tradeoff with (Reading Between the Lines), 716–717 labor market indicators, 515–517 marginally attached workers, 517–518 minimum wage bringing, 131 misery index and rate of, 701, 716–717 most costly, 518 Phillips curve, 701, 708–710 price level and, 522–527 problem of, 514–515 real GDP and, 520–521 structural, 519–521 Unemployment rate, 516, 758 natural, 519, 709–710 Unequal wealth, 454 Union-nonunion wage gap, 426 Union Pacific, 567–569 Unions, 424–426 United Kingdom, 767 United Nations Development Index (HDI), 501 United States (U.S.) See also Dollars, U.S.; Great Depression airplane exports in, 154 air pollution trends in, 394 balance of payments accounts, 631 borrowing for consumption, 633 budget in historical perspective, 730–733 business cycle in, 497, 658 China as top creditor to, 582 China tire trade penalties, 168–169 Congress, 728, 756 consumption function, 675 credit crisis, of 2007-2008, 476, 767 current account deficit of, 725–726 demand-pull inflation in, 704 Department of Commerce, 239, 690 Department of Energy, 266 differential interest rate, 623 distribution of Income, 442, 443, 446–447 economic growth in, 37, 542, 657 financial crisis, of 2008-2009, 568, 576, 598, 767–768 flexible exchange rate in, 628 foreigners buying businesses in, 617 foreign interest rates relative to, 624 GDP measured in, 493–495 government bonds, 538, 594, 767 import demand in, 624 import function, 675 inflation in, 657 international debts, 739–740 Justice Department, 356, 358 labor force shrinking (Reading Between the Lines), 528–529 money in, 591–592 money multiplier, 610–611 natural unemployment rate in, 519–520, 709–710 oil markets in, 431 output gap in, 658 Phillips curve data in, 710 Postal Service, 300, 301 real GDP in, 542, 543, 657 rich getting richer in, 441 standard of living in, 498 structural budget balance in, 742 tax wedge in, 735 trade in, 41 t-shirt import in, 152, 153 t-shirt tariffs in, 157–158 2009 fiscal stimulus package, 742 underground economy in, 144–145, 499–500 world demand for exports, 623 United States v Microsoft, 358 Unit elastic demand, 86, 303 Unit of account, 590–591 Units-free measure, 86 University of California, Berkeley, 10, 132 University of Chicago, 133, 223, 225, 241 University of Texas, Austin, 133 Unlimited liability, 234–236 UPS, 301 Uribe, Martin, 778–780 U.S See United States U.S Department of Agriculture (USDA), 292 U.S interest rate differential, 623 U.S interstate highways, 370 U.S official reserves, 631 U.S Treasury, 768 Used car market, 472–475 Utilitarianism, 116, 116–117 Utility, 181, 466 choosing at margin, 184 expected, 467–468 marginal, 181, 184, 187–192 maximizing, 183–186 risk aversion and, 466 temperature analogy, 192 total, 181 of wealth, 466–467 Vaccinations, 375 Value, 108 See also Present value of demand, 58 GDP market, 490 paradox of, 191 store of, 591 Value of marginal product, 419, 433 Vanderbilt, W H., 356 Variable money multipliers, 601 Variables having maximum and minimum points, 18–19 more than two, 22–23 moving in opposite direction, 17 moving in same direction, 16–17 unrelated, 19 Velocity of circulation, 606 Verizon, 313 VF Corporation, 326 Voluntary export restraint, 162 von Neumann, John, 344, 367 Voodoo economics, 737 Voucher, 383, 384, 415–416 Wachovia, 568 Wage rate aggregate supply related to change in, 651 human capital and, 450 money, 703 opportunity cost and, 423 real, 520, 546 trends in labor markets, 427 Wages, 4, 450 See also Minimum wage; Real wage rate demand-pull inflation and, 703 efficiency, 520 inequality in, 488 rates, 423, 427, 485, 735 reservation, 422 union-nonunion gap in, 426 Wall Street firms, 565 Wal-Mart, 41, 165 Warranties, 474–475 Washington Mutual, 568 Water pollution, 394 Water shortage, case study, 118–119 Wealth, 444, 466, 566, 573–574 aggregate demand curve and, 685 aggregate demand related to effect of, 652–653, 685 distribution of, 444 economic inequality, 444–445 education relating to, 446 expected, 466 income v., 444–445 Index intergenerational transfers of, 454 marriage and, 454 redistribution of, 522 saving and, 566 unequal, 454 utility of, 466–467 Wealth of Nations (Smith), 51, 113, 414, 556 Web Ads (Reading Between the Lines), 244–245 Web browsers, 358 Welch, Finis, 133 Welfare, 455, 457 Wells Fargo, 568 Wendy’s, 98 Westinghouse, 240 White Man’s Burden (Easterly), 646 Williams, Serena, 453 William Wrigley Jr Company, 239 Wimbledon, 453 Women, as better borrowers, 552 Wood, Stephen, 770 Woolf, Virginia, 723 Working-age population, 515 World Economic Forum, 645 The Worldly Philosophers (Heilbronner), 370 World Trade Organization (WTO), 54, 162 World Wide Web, 227 Wright, Sanders, 32 Writers Guild of America, 425–426 WTO See World Trade Organization Yahoo!, 227, 244 Yen, 617, 618 YouTube, 316 Yuan, 498, 618 Zimbabwe, 522 Zvonareva, Vera, 453 I-17 This page intentionally left blank PHOTO CREDITS Michael Parkin (page iv) John Tamblyn College campus (page 1) Image Source/Getty Images Parrot cartoon (page 2) Copyright © 1985 The New Yorker Collection/Frank Modell from cartoonbank.com All Rights Reserved Sneaker factory (page 5) Adek Berry/Getty Images Intel Chip (page 6) Imagebroker/Alamy Pollution (page 6) Digital Vision Lehman Brothers (page 7) Kurt Brady/Alamy Corn (page 29) MNPhoto/Alamy Ethanol gasoline pump (page 29) Alex Farnsworth/The Image Works Boeing (page 41) Randy Duchaine/Alamy Clothing factory (page 41) INSADCO Photography/Alamy Smith (page 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Growth Williamson Macroeconomics Macroeconomic Data These macroeconomic data series show some of the trends in GDP and its components, the price level, and other variables that provide information about changes in the standard of living and the cost of living—the central questions of macroeconomics You will find these data in a spreadsheet that you can download from your MyEconLab Web site NATIONAL INCOME AND PRODUCT ACCOUNTS EXPENDITURE APPROACH Personal consumption expenditures the sum of less equals plus equals plus equals 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 411.5 443.8 480.9 507.8 558.0 605.1 648.3 701.6 770.2 852.0 Gross private domestic investment 102.1 118.2 131.3 128.6 141.2 156.4 152.4 178.2 207.6 244.5 Government expenditure 143.2 151.4 171.6 192.5 209.3 221.4 233.7 246.4 263.4 281.7 Exports 35.0 37.1 40.9 43.5 47.9 51.9 59.7 63.0 70.8 95.3 Imports 28.1 31.5 37.1 39.9 46.6 50.5 55.8 62.3 74.2 91.2 663.6 719.1 787.7 832.4 909.8 984.4 1,038.3 1,126.8 1,237.9 1,382.3 370.7 171.2 399.5 189.7 442.6 203.2 475.1 205.8 524.3 218.6 577.6 225.5 617.2 219.3 658.9 243.3 541.9 589.2 645.8 680.9 742.9 803.1 836.5 902.2 1,000.5 1,121.4 54.6 57.7 59.3 64.1 72.2 79.4 86.6 95.8 101.3 112.0 66.4 70.7 76.5 82.9 90.4 99.2 108.3 117.8 127.2 140.8 662.9 0.8 663.7 717.6 1.5 719.1 781.6 6.2 787.8 827.9 4.5 832.4 905.5 4.3 909.8 Gross domestic product INCOME APPROACH Compensation of employees Net operating surplus Net domestic income at factor cost 10 Indirect taxes less subsidies 11 Depreciation (capital consumption) 12 13 14 15 GDP (income approach) Statistical discrepancy GDP (expenditure approach) Real GDP (billions of 2005 dollars) 16 Real GDP growth rate (percent per year) 725.1 275.4 811.2 310.2 981.7 1,031.4 1,115.8 1,229.0 1,374.2 2.9 6.9 11.0 8.9 8.0 984.6 1,038.3 1,126.8 1,237.9 1,382.2 3,392.3 3,610.1 3,845.3 3,942.5 4,133.4 4,261.8 4,269.9 4,413.3 4,647.7 4,917.0 5.8 6.4 6.5 2.5 4.8 3.1 0.2 3.4 5.3 5.8 191.9 73.1 69.3 3.8 194.3 74.4 71.1 3.4 196.6 75.7 72.9 2.9 198.8 77.3 74.4 3.0 200.7 78.7 75.9 2.8 202.7 80.7 77.9 2.8 205.1 82.8 78.7 4.1 207.7 84.4 79.4 5.0 209.9 87.0 82.1 4.9 211.9 89.4 85.1 4.4 58.7 58.9 59.2 59.6 59.6 60.1 60.4 60.2 60.4 60.8 5.2 4.5 3.8 3.8 3.5 3.5 5.0 6.0 5.6 4.9 18,576 19,559 19,836 20,590 21,021 20,820 21,249 22,140 23,200 OTHER DATA 17 18 19 20 21 22 23 24 Population (millions) Labor force (millions) Employment (millions) Unemployment (millions) Labor force participation rate (percent of working-age population) Unemployment rate (percent of labor force) Real GDP per person (2005 dollars per year) Growth rate of real GDP per person (percent per year) Quantity of money (M2, billions of dollars) 17,675 4.3 5.1 5.3 1.4 3.8 2.1 –1.0 2.1 4.2 4.8 424.7 459.2 480.2 524.8 566.8 587.9 626.5 710.3 802.3 855.5 26 GDP deflator (2005 = 100) 19.6 19.9 20.5 21.1 22.0 23.1 24.3 25.5 26.6 28.1 27 GDP deflator inflation rate (percent per year) 28 Price index (1982–1984 = 100) 29 CPI inflation rate (percent per year) 30 Current account balance (billions of dollars) 1.6 1.8 2.9 3.1 4.3 5.0 5.3 5.0 4.3 5.5 31.0 31.5 32.4 33.4 34.8 36.7 38.8 40.5 41.8 44.4 1.3 1.6 2.9 3.1 4.2 5.5 5.7 4.4 3.2 6.2 6.8 5.4 3.0 2.6 0.6 0.4 2.3 –1.4 –5.8 7.1 25 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 932.9 1,033.8 1,151.3 1,277.8 1,427.6 1,591.2 1,755.8 1,939.5 2,075.5 2,288.6 2,501.1 2,717.6 2,896.7 249.4 230.2 292.0 361.3 438.0 492.9 479.3 572.4 517.2 564.3 735.6 736.2 746.5 317.9 357.7 383.0 414.1 126.7 138.7 149.5 159.4 453.6 500.7 566.1 627.5 680.4 733.4 796.9 878.9 949.3 186.9 230.1 280.8 305.2 283.2 277.0 302.4 302.0 127.5 122.7 151.1 320.3 182.4 212.3 252.7 293.8 317.8 303.2 328.6 405.1 417.2 452.9 1,499.5 1,637.7 1,824.6 2,030.1 2,293.8 2,562.2 2,788.1 3,126.8 3,253.2 3,534.6 3,930.9 4,217.5 4,460.1 890.3 314.1 949.2 351.0 1,059.4 392.3 1,180.6 444.0 1,335.6 508.8 1,498.4 546.4 1,647.7 560.6 1,819.8 652.9 1,919.8 669.2 2,035.7 756.1 2,245.7 910.6 2,412.0 971.0 2,559.4 995.9 1,204.4 1,300.2 1,451.7 1,624.6 1,844.4 2,044.8 2,208.3 2,472.7 2,589.0 2,791.8 3,156.3 3,383.0 3,555.3 121.6 130.8 141.3 152.6 162.0 171.6 190.5 224.1 225.9 242.0 268.7 286.7 298.5 163.7 190.4 208.2 231.8 261.4 298.9 344.1 393.3 433.5 451.1 474.3 505.4 538.5 1,489.7 9.8 1,621.4 16.3 1,801.2 23.5 2,009.0 21.2 2,267.8 26.1 2,515.3 47.0 2,742.9 45.3 3,090.1 36.6 3,248.4 4.8 3,484.9 49.7 3,899.3 31.5 4,175.1 42.3 4,392.3 67.7 1,499.5 1,637.7 1,824.7 2,030.2 2,293.9 2,562.3 2,788.2 3,126.7 3,253.2 3,534.6 3,930.8 4,217.4 4,460.0 4,889.9 4,879.5 5,141.3 5,377.7 5,677.6 5,855.0 5,839.0 5,987.2 5,870.9 6,136.2 6,577.1 6,849.3 7,086.5 –0.6 –0.2 5.4 4.6 5.6 3.1 –0.3 2.5 –1.9 4.5 7.2 4.1 3.5 213.9 92.0 86.8 5.2 216.0 93.8 85.8 7.9 218.1 96.2 88.8 7.4 220.3 99.0 92.0 7.0 222.6 102.2 96.0 6.2 225.1 105.0 98.8 6.1 227.7 107.0 99.3 7.7 230.0 108.7 100.4 8.3 232.2 110.2 99.5 10.7 234.3 111.5 100.8 10.7 236.4 113.5 105.0 8.5 238.5 115.5 107.2 8.3 240.7 117.8 109.6 8.2 61.3 61.2 61.6 62.2 63.2 63.7 63.8 63.9 64.0 64.0 64.4 64.8 65.3 5.6 8.5 7.7 7.0 6.1 5.9 7.2 7.6 9.7 9.6 7.5 7.2 7.0 22,861 22,592 23,575 24,412 25,503 26,010 25,640 26,030 25,282 26,186 27,823 28,718 29,443 –1.5 –1.2 4.3 3.6 4.5 2.0 –1.4 1.5 –2.9 3.6 6.3 3.2 2.5 902.1 1,016.2 1,152.0 1,270.3 1,366.0 1,473.7 1,599.8 1,755.5 1,909.3 2,125.7 2,308.8 2,494.6 2,731.4 30.7 33.6 35.5 37.8 40.4 43.8 47.8 52.2 55.4 57.6 59.8 61.6 62.9 9.1 9.4 5.7 6.4 7.0 8.3 9.1 9.4 6.1 4.0 3.8 3.0 2.2 49.3 53.8 56.9 60.6 65.2 72.6 82.4 90.9 96.5 99.6 103.9 107.6 109.6 11.0 9.1 5.8 6.5 7.6 11.3 13.5 10.3 6.2 3.2 4.3 3.6 1.9 2.0 18.1 4.3 –14.3 –15.1 –0.3 2.3 5.0 –5.5 –38.7 –94.3 –118.2 –147.2 Macroeconomic Data These macroeconomic data series show some of the trends in GDP and its components, the price level, and other variables that provide information about changes in the standard of living and the cost of living—the central questions of macroeconomics You will find these data in a spreadsheet that you can download from your MyEconLab Web site NATIONAL INCOME AND PRODUCT ACCOUNTS EXPENDITURE APPROACH Personal consumption expenditures the sum of less equals plus equals plus equals 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 3,097.0 3,350.1 3,594.5 3,835.5 3,980.1 4,236.9 4,483.6 4,750.8 4,987.3 5,273.6 Gross private domestic investment 785.0 Government expenditure 999.4 1,038.9 1,100.6 1,181.7 1,236.1 1,273.5 1,294.8 1,329.8 1,374.0 1,421.0 Exports 363.8 443.9 503.1 552.1 596.6 635.0 655.6 720.7 811.9 867.7 Imports 508.7 554.0 591.0 629.7 623.5 667.8 720.0 813.4 902.6 964.0 Gross domestic product INCOME APPROACH Compensation of employees Net operating surplus Net domestic income at factor cost 10 Indirect taxes less subsidies 11 Depreciation (capital consumption) 12 13 14 15 GDP (income approach) Statistical discrepancy GDP (expenditure approach) Real GDP (billions of 2005 dollars) 16 Real GDP growth rate (percent per year) 821.6 874.9 861.0 802.9 864.8 953.3 1,097.3 1,144.0 1,240.2 4,736.4 5,100.4 5,482.1 5,800.5 5,992.1 6,342.3 6,667.4 7,085.2 7,414.7 7,838.5 2,737.0 2,955.0 3,132.6 3,328.6 3,441.1 3,634.4 3,800.4 4,002.5 4,199.3 4,395.5 1,078.1 1,199.0 1,270.6 1,298.6 1,317.3 1,400.3 1,486.7 1,641.9 1,770.3 1,959.0 3,815.1 4,154.0 4,403.2 4,627.2 4,758.4 5,034.7 5,287.1 5,644.4 5,969.6 6,354.5 317.2 345.0 371.5 398.0 429.6 453.3 466.4 512.7 523.1 545.6 571.1 611.0 651.5 691.2 724.4 744.4 778.0 819.2 869.5 912.5 4,703.4 5,110.0 5,426.2 5,716.4 5,912.4 6,232.4 6,531.5 6,976.3 7,362.2 7,812.6 32.9 –9.5 56.1 84.2 79.7 110.0 135.8 108.8 52.5 25.9 4,736.3 5,100.5 5,482.3 5,800.6 5,992.1 6,342.4 6,667.3 7,085.1 7,414.7 7,838.5 7,313.3 7,613.9 7,885.9 8,033.9 8,015.1 8,287.1 8,523.4 8,870.7 9,093.7 9,433.9 3.2 4.1 3.6 1.9 –0.2 3.4 2.9 4.1 2.5 3.7 242.8 119.9 112.4 7.4 245.1 121.7 115.0 6.7 247.4 123.9 117.3 6.5 250.2 125.9 118.8 7.1 253.5 126.4 117.7 8.6 256.9 128.1 118.5 9.6 260.3 129.2 120.3 8.9 263.5 131.0 123.1 8.0 266.6 132.3 124.9 7.4 269.7 134.0 126.7 7.2 65.6 65.9 66.4 66.5 66.2 66.5 66.3 66.6 66.6 66.8 6.2 5.5 5.3 5.6 6.9 7.5 6.9 6.1 5.6 5.4 31,069 31,877 32,112 31,614 0.7 –1.6 OTHER DATA 17 18 19 20 21 22 23 24 25 Population (millions) Labor force (millions) Employment (millions) Unemployment (millions) Labor force participation rate (percent of working-age population) Unemployment rate (percent of labor force) Real GDP per person (2005 dollars per year) Growth rate of real GDP per person (percent per year) Quantity of money (M2, billions of dollars) 26 GDP deflator (2005 = 100) 27 GDP deflator inflation rate (percent per year) 28 Price index (1982–1984 = 100) 29 CPI inflation rate (percent per year) 30 Current account balance (billions of dollars) 30,115 2.3 3.2 2.6 32,255 2.0 32,747 1.5 33,671 2.8 34,111 34,977 1.3 2.5 2,830.8 2,993.9 3,158.4 3,276.8 3,377.0 3,430.2 3,480.7 3,496.5 3,640.3 3,819.6 64.8 67.0 69.5 72.2 74.8 76.5 78.2 79.9 81.5 83.1 2.9 3.4 3.8 3.9 3.5 2.4 2.2 2.1 2.1 1.9 113.6 118.3 124.0 130.7 136.2 140.3 144.5 148.2 152.4 156.9 3.6 4.1 4.8 5.4 4.2 3.0 3.0 2.6 2.8 3.0 –160.7 –121.2 –99.5 –79.0 2.9 –51.6 –84.8 –121.6 –113.6 –124.8 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 5,570.6 5,918.5 6,342.8 6,830.4 7,148.8 7,439.2 7,804.0 8,285.1 8,819.0 9,322.7 9,806.3 10,104.5 1,388.7 1,510.8 1,641.5 1,772.2 1,661.9 1,647.0 1,729.7 1,968.6 2,172.2 2,327.2 2,295.2 1,474.4 1,526.1 1,631.3 1,731.0 1,846.4 1,983.3 2,112.6 2,232.8 2,369.9 2,518.4 2,674.2 2,878.3 2,914.9 954.4 953.9 989.3 1,093.2 1,027.7 1,003.0 1,041.0 1,180.2 1,305.1 1,471.0 1,661.7 1,843.4 1,578.4 1,055.8 1,115.7 1,251.4 1,475.3 1,398.7 1,430.2 1,545.1 1,798.9 2,027.8 2,240.3 2,375.7 2,553.8 1,964.7 8,332.4 8,793.5 9,353.5 9,951.5 10,286.2 10,642.3 11,142.1 11,867.8 12,638.4 13,398.9 14,061.8 14,369.1 14,119.0 4,670.0 2,134.7 5,027.8 2,227.4 5,359.2 2,342.6 5,793.5 2,444.9 5,984.5 2,479.8 6,116.4 2,521.6 6,388.3 2,625.4 6,699.6 2,926.3 6,804.7 7,255.2 7,701.8 8,238.4 8,464.3 8,638.0 9,013.7 9,625.9 10,307.5 577.8 603.1 628.4 662.8 669.0 721.4 757.7 817.0 869.3 935.4 972.6 992.3 964.4 963.8 1,020.5 1,094.4 1,184.3 1,256.2 1,305.0 1,354.1 1,432.8 1,541.4 1,660.7 1,767.5 1,849.2 1,861.1 8,346.3 –14.0 8,878.8 –85.3 9,424.6 10,085.5 10,389.5 10,664.4 11,125.5 11,875.7 12,718.2 –71.1 –134.0 –103.4 –22.1 16.6 –7.8 –79.7 13,619.4 14,040.6 14,232.4 –220.6 21.1 136.6 13,939.9 179.1 8,332.3 8,793.5 9,353.5 9,951.5 10,286.1 10,642.3 11,142.1 11,867.9 12,638.5 13,398.8 14,061.7 14,369.0 14,119.0 9,854.3 10,283.5 10,779.8 11,226.0 11,347.2 11,553.0 11,840.7 12,263.8 12,638.4 12,976.2 13,228.9 13,228.8 12,880.6 7,071.5 3,236.0 7,483.6 3,539.7 2007 7,863.0 3,437.5 2008 2,096.7 2009 10,001.3 1,589.2 8,068.1 3,322.8 7,819.5 3,294.9 11,023.3 11,300.5 11,390.9 11,114.4 4.5 4.4 4.8 4.1 1.1 1.8 2.5 3.6 3.1 2.7 1.9 0.0 –2.6 273.0 136.3 129.6 6.7 276.2 137.7 131.5 6.2 279.3 139.4 133.5 5.9 282.4 142.6 136.9 5.7 285.3 143.8 136.9 6.8 288.1 144.9 136.5 8.4 290.8 146.5 137.7 8.8 293.5 147.4 139.2 8.1 296.2 149.3 141.7 7.6 299.1 151.4 144.4 7.0 302.0 153.1 146.0 7.1 304.8 154.3 145.4 9.0 307.5 154.2 139.9 14.3 67.1 67.1 67.1 67.1 66.9 66.6 66.2 66.0 66.0 66.2 66.0 66.0 65.4 5.0 4.5 4.2 4.0 4.7 5.8 6.0 5.5 5.1 4.6 4.6 5.8 9.3 36,102 37,238 38,592 39,750 39,768 40,096 40,711 41,784 42,664 43,391 43,801 43,397 41,890 3.2 3.1 3.6 3.0 0.0 0.8 1.5 2.6 2.1 1.7 0.9 –0.9 –3.5 4,033.0 4,376.3 4,634.6 4,917.9 5,434.1 5,785.9 6,073.7 6,415.2 6,679.2 7,079.5 7,509.4 8,241.6 8,524.3 84.6 85.5 86.8 88.6 90.6 92.1 94.1 96.8 100.0 103.3 106.3 108.6 109.6 1.8 1.1 1.5 2.2 2.3 1.6 2.2 2.8 3.3 3.3 2.9 2.2 0.9 160.5 163 166.6 172.2 177.1 179.9 184.0 188.9 195.3 201.6 207.3 215.3 214.5 2.3 1.6 2.2 3.4 2.8 1.6 2.3 2.7 3.4 3.2 2.8 3.8 –0.4 –140.7 –215.1 –300.8 –416.4 –397.2 –458.1 –520.7 –630.5 –747.6 –802.6 –718.1 –668.9 –378.4 READING BETWEEN THE LINES Reading Between the Lines, which appears at the end of each chapter, helps students think like economists by connecting chapter tools and concepts to the world around them Fuel Choices, Food Crises, and Finger-Pointing Coffee Surges on Poor Colombian Harvests Frigid Florida Winter Is Bad News for Tomato Lovers More Ash Fallout: 10 Million Roses Ruined Bipartisan Plan to Crack Down on California’s Underground Economy 144 China: Tire Trade Penalties Will Hurt Relations with U.S Salaries, Strong Recruitment Ease Area Paramedic Shortage Ducks Give Perry $26.6 Million Deal 44 74 98 120 168 196 196 Amazon.com E-Book Sales Exceed Hardcovers for First Time 216 10 Facebook Makes Gains in Web Ads 11 Here Come the “Smart” Meters 12 Bumper Harvests Bring Stability 13 Data Show Google Abuses Search Role, Group Contends 14 Apple Sues Rival HTC as Phone Competition Rises 15 Battle for Beards Heats Up 16 Protective Net for All Residents; Q&A Legislation Details 17 Oil Spill Pushes Carbon Tax Back into Spotlight 18 Outlook for Job Market Is Grim; When Jobs Do Return, Many Won’t Pay Well 432 19 What Happened to All That Anger Over CEO Pay? 20 Princeton Leads in Grade Deflation 21 Shape of Recovery Long, Slow Growth … a “Square Root” Slog 22 U.S Labor Force Shrinks Amid Jobs Market Woes 23 China Pips Japan but “Still a Developing Nation” 24 “Borrowing to Live” Weighs on Families, Firms, Nation 25 It Falls to the Fed to Fuel Recovery 26 Dollar Faces Increasingly Strong Set of Headwinds 27 GDP Figures Revised Downward 28 Business Inventories Post Biggest Gain in Years 29 Evidence and Denial; Obama Advisers Refuse to Believe They’re Failing 716 30 Republicans’ Two-Point Plan to Create Jobs: Can It Work? 31 Poor U.S Jobs Data Open Way for Stimulus 244 266 292 316 334 360 386 406 458 478 528 558 582 608 636 664 770 690 746 502 Economics in Action Economics in Action boxes apply economic theory to current events to illustrate the importance of economic forces in the world around us Life in a small and ever-shrinking world Chips and windows Greenhouse gas emissions A credit crunch Increasing opportunity cost on the farm 32 Hong Kong catching up to the United States 37 The United States and China gain from trade 41 The original tragedy of the commons 400 One of today’s tragedies of the commons 401 ITQs work 405 18 Wage rates in the United States 427 The world and U.S markets for oil 431 19 The rich get richer, but school still pays 446 Income redistribution: Only the richest pay 456 The global market for crude oil 69 The market for strawberries 71 20 Insurance in the United States 471 The sub-prime credit crisis 476 Elastic and inelastic demand 89 The elasticities of demand for food 90 Necessities and luxuries 93 21 A broader indicator of economic well-being 501 The invisible hand 113 Rent control winners: The rich and famous 130 Unscrambling cause and effect of the minimum wage 132 Workers and consumers pay the most tax 138 Rich high-cost farmers the winners 141 Trading services for oil 152 U.S tariffs almost gone 158 Self-interest beats the social interest 162 Maximizing utility from recorded music 192 Best affordable choice of movies and DVDs 212 10 Types of firms in the economy 236 Concentration in the U.S economy 239 A competitive environment 241 Apple doesn’t make the iPhone 243 11 How to pull up your average 256 Produce more to cut cost 265 12 Production cutback and temporary shutdown 283 Entry and exit 285 22 What keeps Ben Bernanke awake at night 514 Structural unemployment and labor reallocation in Michigan 520 23 Fast trains on the same track 544 Intellectual property rights propel growth 550 Women are the better borrowers 552 24 The financial crisis and the fix 568 Loanable funds fuel home price bubble 576 Greenspan’s interest rate puzzle 581 25 Official measures of U.S money 591 Commercial banks flush with reserves 595 The Fed’s balance sheet explodes 598 The variable money multipliers 601 Does the quantity theory work? 606 26 The U.S dollar: More down than up 619 The dollar on a roller coaster 625 The People’s Bank of China in the foreign exchange market 629 Three decades of deficits 632 The three sector balances 635 13 Information-age monopolies 301 Attempting perfect price discrimination 312 27 Fiscal policy and monetary policy to fight recession 654 U.S economic growth and inflation 657 The U.S business cycle 658 14 Monopolistic competition today 325 The cost of selling a pair of shoes 331 28 The U.S consumption function 675 The multiplier in the Great Depression 684 15 Oligopoly today 343 An R & D game in the market for diapers 350 The United States versus Microsoft 358 FTC takes the fizz out of soda mergers 359 29 The shifting short-run tradeoff 710 16 Is a lighthouse a public good? 375 Fighting California’s wildfires 379 Delivering health care efficiently 384 17 U.S air pollution trends: Cleaner and safer 394 The greatest market failure? 398 30 The U.S government budget in global perspective 732 Some real-world tax wedges 735 The 2009 fiscal stimulus package 742 How big are the fiscal stimulus multipliers? 744 31 FOMC decision making 758 A view of the long and variable lag 766 The Taylor rule 769 ... External Benefits D = MB 20 25 Price and cost (thousands of dollars per student per year) 3 82 An Efficient Outcome with an External Benefit 40 MSC 30 MSB = MSC 25 Paid by taxpayer 20 10 Paid by buyer... Market Failure? Global CO2 concentration 370 350 330 2 310 –4 –6 Global temperature CO2 concentration (parts per million) 398 –8 1850 1870 1890 1910 1930 1950 1970 1990 20 10 Year Global Warming... airplanes because unless each party proposes airplanes, the other party will beat it in an election animation 379 Economics in Action Fighting California’s Wildfires During the 20 09 wildfire season (July