; The Role of Government in a Market Economy
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The Role of Government in a Market Economy

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									The Role of Government in a
     Market Economy
Lesson taken from

Bosshardt, W., Miller, S., Schug, M., and VanFossen,

      P., (Eds.). (2009) Understanding Economics in

      Civics and Government. New York, NY: National

      Council on Economic Education.
 Identify and analyze the economic functions
  of government in a market economy.
 Classify government economic activities
  according to the six economic functions of
 Analyze governmental economic actions
  within the liberal/conservative framework.
 What are some economic activities of local, state
  and national governments?
 The government could provide all of its citizens
  with an iPad. What problems might arise if
  government expanded its role along these lines?
 The government regulates some things but not
  others. Why not regulate in every problem area?
  What would happen if the government decided
  that all cars in the US must be yellow since yellow
  cars are easier for other drivers to see?
 Most Americans agree that the government
  should regulate some areas and not others.
  How does the government decide what to
 What criteria should there be in limiting the
  government’s role in our market economy?
 Most economists argue that there are six
  legitimate roles of government in a market
   Role of Government in Market
 Maintain the legal and social framework
  – Define and enforce property rights.
  – Establish a monetary system.
   Role of Government in Market
 Maintain Competition.
  – Create and enforce antitrust laws, and
    regulate natural monopolies

 Provide Public Goods and Services
  – Public goods and services are those that
    markets will not provide in sufficient
             Private Goods

 Most goods and services produced in
  market economies are private goods and
  services. The consumers who purchase
  these goods consume these goods.
 Private goods are goods for which exclusion
  is possible and for which the marginal cost
  of another user is positive
 Examples:
                Public Goods
 Public goods differ from private goods
  because they have the following
  – Shared consumption: When one person
    consumes a public good, it does not prevent
    others from also consuming the good
  – Nonexclusion: Once a public good is produced
    it is difficult or impossible to exclude others from
    consuming the good even if they didn’t pay for
             Public Goods
 Because people can consume public goods
  without paying for them (the free rider
  problem), private businesses do not have
  incentives to produce enough public goods.
  Therefore, the government provides them,
  through tax dollars, if people want them.
         More on Public Goods
 Few examples of pure public goods, but many
  goods have some public good characteristics and
  are therefore provided by the government
 How do the following illustrate shared
  consumption and/or non-exclusion?
  – Fire protection, police protection, lighthouses, weather
    forecasts etc.
 Public goods are examples of positive externalities
    Role of Government in Market

 Stabilize the economy by reducing
  unemployment and inflation and promoting
  economic growth
  – Fiscal policy
  – Monetary policy
 Redistribute Income
  – Redistribute income from people who have
    higher incomes to those with lower incomes.
    Role of Government in Market

 Correct for Externalities
  – Reduce negative externalities.
  – Encourage increased production of goods and
    services that have positive externalities.

 Market prices usually reflect the costs
  producers pay to produce goods and the
  benefits consumers receive from the good.
  A kind of market failure occurs when market
  prices fail to reflect all the costs and all the
  benefits involved. This kind of market failure
  is called an externality problem.
 Externalities exist when some of the costs or
  benefits associated with the production or
  consumption of a product spill over to third
  parties, who do not produce or pay to
  consume the product.
        Negative Externalities
 Negative externalities: costs paid by
  someone who does not produce or pay to
  consume a product
 Example:
 Because of these costs the government
  provides incentives (laws/fines) to reduce
  production of these goods or services
        Positive Externalities
 Positive: benefits enjoyed by someone who
  does not produce or pay to consume a
  – Examples:

  – Government usually subsidizes the production
    of externalities or provides them
 Read and complete Activity 4.2.
 Read Activity 4.3.
  – Suppose a US senator proposes legislation that
    increases taxes for higher-income taxpayers, in
    order to provide more funds for public
  – A congressional leader argues that there should
    be a constitutional amendment that limits the
    size of the federal government.
 How would a liberal respond to headline #
  9? How would a conservative respond?
 What are the six economic functions of
  – Maintain legal and social framework
  – Maintain competition
  – Provide public goods and services
  – Correct for externalities
  – Stabilize the economy
  – Redistribute income
 Why, since there is broad agreement that
  government should perform these functions,
  is there disagreement sometimes about
  whether government should engage in
  particular activities?

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