The Economic Functions of Government

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SSEF5 – The student will describe the roles of government in a market economy.

A. Explain why government provides public goods and services, redistributes income, protects property rights, and resolves market failures.

B. Give examples of government regulation and deregulation and their effects on consumers and producers.

Six Economic Functions of Government

1. Provide a legal system2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income

Six Economic Functions of Government

1. Provide a legal system– Define and enforce property rights– Establish a monetary system– Maintain access to information

– Knowledge is Power • When individuals/consumers

are not informed many things can happen:

– Fewer profits– Lack of competitive wages– Unsafe products, high prices

– Government Regulates to maintain people’s access to info

• Public Disclosure Laws• Support of the Internet

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition

– Create and enforce antitrust laws– Regulate natural monopolies

Inadequate Competition – Competition-Sellers compete against each other to

attract customers • leads to lower prices • better quality goods/services• better customer service

– Monopolies dangerous. • Limited choice• low quality goods/services • higher prices• Inefficient use of resources

– Government creates/enforces anti-trust (monopoly) laws to maintain effective levels of competition

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services

– Public goods and services are those that markets will not provide in sufficient quantities

Examples: roads, police protection, fire protection, national defense, schools, public libraries, public parks, etc.

Six Economic Functions of Government

3. Provide public goods and services4. Correct for externalities

– Unintended side effect of doing business– Side effect that affects an uninvolved 3rd party– Can be positive or negative

• Examples:– Pollution, noise near airport, traffic near a shopping center,

better roads because of a new sports stadium

Externalities

• Government can manage externalities by using –tax policies–regulations– incentives

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy

– Reduce unemployment and inflation– Promote economic growth

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income

◦ Redistribute income from people who have higher incomes to those with lower incomes

◦ Examples: Social Security, Medicare/Medicaid, welfare programs

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income

Activity Time!

Life on a Dismal Lake

Time for Another Activity

Economics is soooo dreamy!

Classify the Headlines according to the function of government.

1. Federal Reserve Raises Key Interest Rate ___2. Congress Raises tax rates for Top Income

Brackets ___3. EPA Plan to Reduce CO2 Emissions ___4. Homeland Security Funding Increased ___5. President Says More Spending Will Fight

Recession ___6. Agency Blocks merger of Two Airlines ___

Classify the Headlines

7. City Police Increase Neighborhood Patrols ___8. Lawsuit Establishes Patent Rights ___9. Legislature Passes Funding for Subsidized Housing

___10. New Info from Government Agency Helps

Consumers Choose Wisely ___11. Songwriter Sues Singer: Says Songs Stolen ___12. County Funds Free Flu Vaccinations ___

Let’s Check!1. Federal Reserve Raises Key Interest Rate

1. (Stabilize the economy)

2. Congress Raises tax rates for Top Income Brackets (Redistribution of income)

3. EPA Plan to Reduce CO2 Emissions 1. (Correcting externalities)

4. Homeland Security Funding Increased1. (Providing public goods/services)

5. President Says More Spending Will Fight Recession (Stabilize the economy)

6. Agency Blocks merger of Two Airlines (maintain competition)

Let’s Check!

7. City Police Increase Neighborhood Patrols (providing public goods/services)

8. Lawsuit Establishes Patent Rights (maintaining a social/legal framework)

9. Legislature Passes Funding for Subsidized Housing (redistribution of income)

10. New Info from Government Agency Helps Consumers Choose Wisely (maintaining legal and social framework)

11. Songwriter Sues Singer: Says Songs Stolen (maintaining legal and social framework)

12. County Funds Free Flu Vaccinations providing public goods/services

Regulation ExamplesGovernment regulation is typically a legal restriction or requirement by the government on the way a good or service is produced, allocated, or priced.•There are literally thousands of examples.•Some of the more common regulations include minimum wage, health standards for hotels/restaurants, hiring/firing practices of companies, the way pollution andwaste is dealt with, safety requirements for consumer products, requirements to post information about food for restaurants, etc.•Some services like water, electricity, communications, travel, etc are heavily regulated to make these goods available to the widest number of people possible.•Regulations affect consumers AND producers.•Producers are affected mainly because regulations increase the cost of doing business.

Regulation Examples•Resources that could be used to produce a good or service instead must be reallocated to meeting the regulation (with time often being one of the biggest resources needed for this).•For consumers, the effects of regulations are a bit mixed.•The increased cost of doing business on the producer likely means increased prices for the consumer.

Regulation Examples

• However, some regulations are actually desirable for the consumer like health inspections of restaurants, minimum safety requirements for automobiles, requirement for licenses to be a doctor or lawyer or teacher, etc.

Deregulation Examples

•Government de-regulation is the reduction by a government of its interventional role in the functioning of the economy.•This allows greater freedom to all the players in the marketplace to operate.•The rationale for deregulation is that fewer and simpler rules will raise the level of competition, generate higher productivity, more efficiency and lower prices.

Deregulation Example

•However, too much deregulation could lead to compromising quality standards, financial uncertainty, and the creation of monopolies.•Government deregulation has happened in industries including trucking, communications, banking, and airlines.•For the most part, these de-regulated industries have seen more competition, easier market entry, and more competitive consumer prices (though not always).•Some critics argue, however, that these industries have taken on unnecessary risk (especially in banking) and actually raised prices for some basic consumer services.

Assessment

Assessment

1. Public goods and services area) All goods and services paid for by the

governmentb) Goods and services provided by publicly held

companiesc) Goods and services that would not be

adequately provided by the market.d) Goods and services that are available to the

public.

Assessment

2. Establishing and enforcing clearly defined property rights is an example of government

a) Providing a social and legal framework.b) Maintaining competitionc) Providing public goods and servicesd) Redistributing income

Assessment

3. Smoke from a factory drops ash all over your car. Government’s economic function in this case is to:

a) Stabilize the economyb) Maintain competitionc) Provide public goods and servicesd) Correct a negative externality.

Assessment4. The Federal trade Commission recommends that

the Smokin’ Hot Computer Corporation be broken into several smaller, independent companies. This is an example of the government’s function of:

a) Maintaining competitionb) Redistributing Incomec) Maintaining the Legal and Social frameworkd) Providing public goods and services

Assessment5. The fed announced today that it will cut a key

interest rate by two basis points. This is an example of the government’s function to

a) Correct for externalitiesb) Stabilize the economyc) Redistribute incomed) Maintain the legal and social framework

Assessment: Extended Response6. Federal regulations now require Internet radio

stations to pay substantial royalty fees (fees to artists and songwriters) for the music they play. Some stations were not able to pay the fees and have gone “off the air.” What economic function of government is this an example of? Who benefits from the regulation? How? Why? Who loses because of the regulation? How? Why? What argument would you make for and against the regulation?

Assessment Check

Please trade papers with someone outside your team.

Assessment Check

1. Public goods and services area) All goods and services paid for by the

governmentb) Goods and services provided by publicly held

companiesc) Goods and services that would not be

adequately provided by the market.d) Goods and services that are available to the

public.

Assessment Check

2. Establishing and enforcing clearly defined property rights is an example of government

a) Providing a social and legal framework.b) Maintaining competitionc) Providing public goods and servicesd) Redistributing income

Assessment Check

3. Smoke from a factory drops ash all over your car. Government’s economic function in this case is to:

a) Stabilize the economyb) Maintain competitionc) Provide public goods and servicesd) Correct a negative externality.

Assessment Check4. The Federal trade Commission recommends that

the Smokin’ Hot Computer Corporation be broken into several smaller, independent companies. This is an example of the government’s function of:

a) Maintaining competitionb) Redistributing Incomec) Maintaining the Legal and Social frameworkd) Providing public goods and services

Assessment Check

5. The fed announced today that it will cut a key interest rate by two basis points. This is an example of the government’s function to

a) Correct for externalitiesb) Stabilize the economyc) Redistribute incomed) Maintain the legal and social framework

Assessment Check

Federal regulations now require Internet radio stations to pay substantial royalty fees (fees to artists and songwriters) for the music they play. Some stations were not able to pay the fees and have gone “off the air.” What economic function of government is this an example of? Who benefits from the regulation? How? Why? Who loses because of the regulation? How? Why? What argument would you make for and against the regulation?

Assessment CheckThese regulations are an example of government policy aimed at establishing and enforcing property rights. The protection of property rights is an element of the legal and social framework government establishes. In this case, singers and songwriters benefit from the legal protection in question; the regulation maintains their property rights and their incentive to produce music. Radio station operators and listeners lose, because there are fewer Internet radio stations and less choice for listeners.

Homework

Many city governments subsidize the construction of sports stadiums as a way to attract or hold on to sports teams. First, write an argument for this practice, using the economic functions of government to support your claim. Then present an alternative view, arguing against your initial claim.