Us Economy: Private and Public Sectors - Research Paper Example

Us Economy: Private And Public Sectors Introduction In this paper, the United States economy is explored in terms of private and public sector. The private sector is composed of businesses and households; where as the public sector refers to the government. To examine the businesses and households, the paper provides institutional details on two. The public sector is looked at in terms of government role in the economy PRIVATE SECTOR: Households The households in any economy form a major component in the circular flow diagram. In the economy of United States, the households are estimated to be about 114 million. The households are the final suppliers of resources needed in an economy, and spenders in the economy (Campbell & Stanley, 2004, 73). Household as income receivers The income earned by the households can be categorized by how the income was divided among the households and how it was earned. First category is the functional distribution of income. The functional distribution of income simply shows how the income earned by the households was spent. The largest income source of income for the households in United States is salaries and wages offered to the workers (Campbell & Stanley, 2004). The second category of household income is the personal distribution of income. This kind of income shows how the aggregate income of a nation is divided among the households. Evidence shows that personal income in United States is unequally distributed. Less than 20 percent of households get half of the total income (Campbell & Stanley, 2004). Household as spenders The other issue regarding the households in private sector is how they spend their income. Some of the household income goes to the government as taxes. The rest of income goes to personal savings, and consumption. In 2007, more than $1483 billion of the households’ income in United States was paid as personal taxes (Campbell & Stanley, 2004, 75). Personal saving which is also an avenue through which households spend their income, refers to that portion of income that is not consumed after a tax has been deducted from the total income. It has been estimated that households in United States save three percent of their income every year. Households are stimulated to save because of speculative and security reasons. They save so as to be able to cater for unforeseen risks such as: accidents, sickness, and unemployment. The households use some of their money in purchasing of shares in stock market, as they speculate that their money will increase in terms of value. In the United States economy, 10 percent of households save their income. In 2007, $43 billion of household income accounted for personal saving (Campbell & Stanley, 2004). Personal consumption is the third way in which households may spend their income. In United States economy, the households spend 86 percent of their income on personal consumption (Campbell & Stanley, 2004, 74). The households spend their money on durable and non-durable goods, and service, where the money goes back to business sector. The money that households spend on durable goods accounts for 11 percent of the total consumer expenditure, where as expenditure on non-durable goods accounts for 29 percent of the total expenditure. The expenditure on services in United States by households is greater than on goods (Campbell & Stanley, 2004). The Business Population: Businesses in United States form the second significant fraction of the private sector. They contribute a lot to the circular diagram. Businesses in United States are categorized into three groups: sole proprietorship, partnership, and corporation. Regarding the United States economy, the sole proprietorships form the largest part of the business population. It has been estimated that 72 percent of the businesses in U.S. fall under sole proprietorship. The reason for high number of these businesses is because: they are easy to establish, and organize. Partnerships form the least part of U.S business population, which is estimated to be 8 percent of the total business population (Campbell & Stanley, 2004). The rest of the business population represents corporations. However, the corporation represents the largest percentage of the total output to the U.S. economy. Corporations contribute about 84 percent of the total business output to the economy of United States. Though sole proprietorships form the largest percentage, their contribution to the national economy in U.S. is very minimal. Partnership businesses account for 11 percent of the total output (Campbell & Stanley, 2004, 76). As a result of numerous advantages arising from corporate businesses; the corporate businesses have dominate the United States economy. Corporations have been found to be effective in mobilizing funds to finance the growth of the businesses’ facilities. To raise funds, a corporation may sell bonds and stocks to enable it mobilize resources of many people (Campbell & Stanley, 2004). Financing corporations through sale of bonds and stocks has external advantages to the purchasers. The purchasers have the opportunity to spread risk as they can invest in different corporations. It is also easy for the security holders to sell the bonds and stocks. The ease of sale makes the savers to be more willing to purchase the corporate securities. Investing in corporate securities makes it easier for the investors to access bank credit services than investing in the other forms of business (Campbell & Stanley, 2004). Another advantage that has made corporate businesses to become dominant in United States is that, corporations give limited liability to the stakeholders. In case a corporation defaults its debts, the assets of stakeholders are not at risk (Campbell & Stanley, 2004, 77). The stakeholders can not be sued by the creditors. However, due to the large size of corporations, it has created problems to the business organization. The fact that the owners have no direct control of the business, decision making process takes long duration. This has affected many big corporations in United States to a point of making them to be less effective and efficient. PUBLIC SECTOR: The public sector in U.S. which is composed of federal, state and the local government has extensive economic duties to execute. There are several roles which the government of Unites States plays towards achieving its economic goals. Firsts, the United States government provides the legal structure. For the market economy to function properly, the government provides the required services and framework. In U.S., the legal framework introduce to the business enterprises legal status, ensure private ownership right are respected, and ensure that contracts enforcement is done accordingly (Campbell & Stanley, 2004). Second the United States public sector maintains competition in the market. In any market system, the fundamental regulatory mechanism is competition. Competition subjects the resource owners and the producers to the sovereignty of consumers. The United States government is responsible in controlling the market forces only under monopolistic market. In this case the government uses antitrust and regulation to control the monopoly power. Under some situations, the government allows the operation of monopolies but creates commissions to control the prices of their products and the standard of goods. The fact that competition ensures quality production, the federal government has come up with regulations to eliminate monopolies (Campbell & Stanley, 2004). Third, the United States public sector is responsible for income redistribution. The private sector is too impersonal and may not distribute income equally to all citizens (Campbell & Stanley, 2004). Due to failure of the market system in redistribution of income, the United States government plays a key role in this area. The government uses several policies and programs to redistribute income. These include: Transfer pavements: these include programs such as food stamps, welfare checks, unemployment compensation, and relief to the older citizens, disabled and dependants. Market intervention: the government may exercise market intervention by altering the prices of goods and services so as to modify the Markey forces. Taxation: the United States government taxes the personal income of the rich people more than that of the poor to reduce the gap between the two. (Campbell & Stanley, 2004) Fourth, the government of United States plays a significant role in resource reallocation. There can be market failure if the competitive market system does not produce the required amount of products, and fails to allocate resources towards production of certain goods and services. The market failures result from spillover effects or externalities, and public goods (Campbell & Stanley, 2004). The externalities are positive or negative effects which affect the third party. For this reason, the externalities are classified into two: negative externalities, and positive externalities. The negative externalities are costs which the third parties suffer without any compensation; for example, pollution of the environment. The U.S. government corrects the negative externalities through legislation and imposition of the tax to the responsible parties. The positive externalities are the uncompensated benefits which may accrue to the third parties; for example education (Campbell & Stanley, 2004). The U.S. government to correct positive externalities normally subsidizes the consumers and suppliers. For example, U.S. government gives loan to students at very low interest rates. The U.S. government also provides goods and services to the citizens (Campbell & Stanley, 2004). For example, the U.S. government offers postal services to the citizens. The market failure may also occur when the market system can not provide public goods and services. Goods which are non-rivalry and non-excludable can not be provided by the market system. For this matter, the U.S. government plays an important part. For example, the U.S. government has the responsibility to control environmental pollution, fight against terrorism, and light the streets (Campbell & Stanley, 2004). However, some of the public goods can be offered by the private sector. These include: education, fire protection, police, medicine, and libraries among many others (Campbell & Stanley, 2004). Such goods are referred to as quasi-public goods. Last and not the least, the government is responsible in promoting stability. The federal government is the one responsible in coming up with framework that can be used to maintain macroeconomic stability. The U.S. Federal Reserve ensures that there is full employment of resources and stability in prices (Campbell & Stanley, 2004). The Federal Reserve must come up with the correct monetary and fiscal policies to correct any problem that may lead to macro economic stability. Conclusion In conclusion, both the private and public sectors are very significant to the U.S. economy. The two sectors depend on each other for their success and survival. The private sector must rely on public sector and vice versa. However, due to presence of competition in private sectors especially on the business side, the private sector offer quality goods and services to the consumers compared to the public sector. Also, the private sector generates a lot of income to the economy through personal taxes, and indirect taxes on goods and services. The public sector is significant in ensuring the welfare of households and setting conducive environment for doing business. Reference: Campbell, McConnell & Stanley, Brue. Microeconomics: Principles, Problems, and Policies. New York: McGraw-Hill Professional, 2004, p. 73-82 Read More