Sectors of the US Economy

Recall:

• “Private Sector” = Households + Businesses

• “Public Sector” = Government

I. Households

3 ways to use income:

1.Taxes (after taxes, the remaining income is called “disposable income”

2.Spending/Consumption

3.Savings

(This will be very important later when we do National Income Accounting.)

II. Businesses/FirmsForms of Business Organization

Sole Proprietorship

Partnership Corporation

# of Owners

Advantages

Disadvantages

Also with corporations: some legal costs to set up, but these are usually very small.

III. Government

Still fulfills important functions in a free market, some of which make sure the free market works:

1. Maintain competition: prevent monopolies, or regulate “natural monopolies”

2. Redistribute income (how much is controversial)

a) Transfer payments:

Primary “entitlement” programs: Social security, Medicaid, welfare, Medicare

b) Note that there are costs and benefits to ALL gov’t action

Gov’t (continued)3.Re-allocate resources to correct market failure

• Externalites/spillovers: some market transactions involve a cost or benefit (when the product is produced, bought/sold, or used) to some 3rd party not involved in the transaction.

• Negative externalities: gov’t can legislate or tax

• Positive externalities: gov’t can provide or subsidize

Gov’t (continued)4.Provide public goods (nat’l defense, lighthouses, roads,

etc.)

5.Ensure stability and growth (low unemp, low inflation, steady growth); can be controversial