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Role of GovernmentRole of Governmentin a Market Economyin a Market Economy
Role of GovernmentRole of Government
Provide Public Goods & Services
Redistribute Income
Protect Property Rights
Resolve Market Failures
Regulation
Provide Public Goods & ServicesProvide Public Goods & Services Public Good Public Good – a good/service provided – a good/service provided
free to everyone - excludes no one from free to everyone - excludes no one from using itusing it
Impractical or impossible to charge for useImpractical or impossible to charge for use
One person’s use does not prevent or One person’s use does not prevent or reduce another persons usereduce another persons use
Problem: Problem: Free Riders Free Riders – someone who – someone who wouldn’t pay for the good/service but gets wouldn’t pay for the good/service but gets use if provided as public gooduse if provided as public good
Resolve Market FailuresResolve Market Failures Market Failure Market Failure – markets do not distribute – markets do not distribute
resources efficientlyresources efficiently
Free riders are an exampleFree riders are an example
Occurs because in private industry cost Occurs because in private industry cost >> benefit benefit to one individualto one individual
Government steps in to provide so that group Government steps in to provide so that group benefits exceed costbenefits exceed cost
Correct for Correct for externalitiesexternalities (side effects; over or (side effects; over or underproduction of goods)underproduction of goods)
Redistribute IncomeRedistribute Income Shifting income from those who have it to those who Shifting income from those who have it to those who
need it need it oror reducing what people need to pay for reducing what people need to pay for
Cash Transfer PaymentsCash Transfer Payments: direct payments of : direct payments of money without receiving a good/service in exchangemoney without receiving a good/service in exchange
EX: TANF, Social Security, Unemployment, Workers CompEX: TANF, Social Security, Unemployment, Workers Comp
Other programs: Other programs: In Kind benefits In Kind benefits
(food stamps) (food stamps) Medical assistance Medical assistance
(medicare/medicaid)(medicare/medicaid) Education Education
(grants, financial aid, free reduced lunch, SAT waiver, AP (grants, financial aid, free reduced lunch, SAT waiver, AP Test subsidy)Test subsidy)
Protect Property RightsProtect Property Rights Protect legal ownership of resources including right Protect legal ownership of resources including right
to own or sell them – both physical & intellectualto own or sell them – both physical & intellectual
Create incentive for people & firms to create ideas Create incentive for people & firms to create ideas & goods, innovations, invest in the future& goods, innovations, invest in the future
Send signals of who to reward for care of resource Send signals of who to reward for care of resource & who to punish for misuse; encourages wise use & & who to punish for misuse; encourages wise use & protection of resourceprotection of resource
Examples:Examples: Copyright lawsCopyright laws TrademarksTrademarks Increased property valuesIncreased property values
RegulationRegulation
Maintain competition Maintain competition – – enforcing enforcing anti-trust lawsanti-trust laws
Control Control priceprice, , qualityquality and and outputoutput
Exs. Justice Dept v Microsoft, gas Exs. Justice Dept v Microsoft, gas company deregulation in GA, company deregulation in GA, public service commissionspublic service commissions
Societal DecisionsSocietal Decisions
3 questions of allocation:3 questions of allocation: What goods and services should be What goods and services should be
producedproduced? (determined by available ? (determined by available resources)resources)
How should these goods and services be How should these goods and services be produced? produced? (combination of factors of (combination of factors of production)production)
Who consumes these goods and Who consumes these goods and services? services? (distribution decisions)(distribution decisions)
Economic concept that leads to Economic concept that leads to choices in any society:choices in any society:
SCARCITYSCARCITY
6 economic goals guiding society’s 6 economic goals guiding society’s choice of systems:choice of systems: Economic EfficiencyEconomic Efficiency
Making the most of resourcesMaking the most of resources Economic FreedomEconomic Freedom
Freedom from government interventionFreedom from government intervention Economic Security & PredictabilityEconomic Security & Predictability
Assurance that goods and services will be availableAssurance that goods and services will be available Provision of a safety netProvision of a safety net
Economic EquityEconomic Equity Fair distribution of wealthFair distribution of wealth
Economic Growth & InnovationEconomic Growth & Innovation Innovation leads to growthInnovation leads to growth Growth leads to higher standard of livingGrowth leads to higher standard of living
Other goalsOther goals?? Environmental protection; universal healthcareEnvironmental protection; universal healthcare
Four main types of economic Four main types of economic systemssystems
TraditionalTraditional Relies on habit, custom, or ritual to answer 3 Relies on habit, custom, or ritual to answer 3
questionsquestions Command/Centrally PlannedCommand/Centrally Planned
Government decides how to answer 3 questionsGovernment decides how to answer 3 questions Market/Free EnterpriseMarket/Free Enterprise
Individuals and firms answer the 3 questionsIndividuals and firms answer the 3 questions MixedMixed
Market-based systems in which the government plays a Market-based systems in which the government plays a rolerole
Along a continuumAlong a continuum