Why the Government gets involved

Mixed Economies – Market side

• The U.S. has…..• Free Enterprise – very little government and more

consumer sovereignty• Consumer Sovereignty = Consumers ultimately

decide what gets produced• Competition = when businesses compete for

consumer $• Limited Government = The gov’t is expected to play

a small role in our economy – basically their duty should be to prevent market failures.

Balancing Control with Freedom

• Each society must decide WHICH goals are most important

• Freedom, security and growth rank high in our system

• Government often interferes to prevent a MARKET FAILURE or to fix an existing market failure

• Market failure = over/underproduction that occurs when producers/consumers DO not have to bear full costs – usually related to externality or need for public good

Providing Economic Security

• Government must regulate to protect businesses, consumers, and workers – Protecting the PUBLIC INTEREST

• Consumer Protection:– Gov’t requires safe products– Law binding Contracts to protect bad deals

• Business Protection:– Gov’t bailouts– Tax breaks– Low interest loans for start up

• Workers– OSHA– Safety Gear– Wage protection

Public Goods

• Government provides PUBLIC GOODS • Public Goods = a good or service that would be

impractical for the private sector (business or individuals) to provide b/c there is no profit motive or incentive, so the public sector (gov’t) steps in.

• FREE RIDER – someone who benefits from not purchasing (a cheat). Ex: Alexa uses Shannon’s Six Flag Season Pass

• Examples – roads, dams, national parks, national defense, public education

• How does gov’t pay – taxing or borrowing money

Our Opportunity Cost

• Government regulation means less economic freedom

• Weigh the costs and benefit of having gov’t involved

• What if government did not provide public goods?

• Why wouldn’t a producer want to provide these types of goods?

Externalities

• Externalities = A side-effect or third-party effect that occurs when the benefits or costs associated with a product affect someone other than the direct producer or direct consumer

• Positive Externality – enjoying the side effects of a good/service at no cost to you

• Negative Externality – when you pay an opportunity cost b/c of someone else’s product/service

Examples of Positive Externalities

• Parks – you do not pay for them, but you probably enjoy them

• Worker Training – another company trains people and you later high them – you enjoyed the train worker, but did not pay for his training

• A classmate post the answers to the homework on social media

• Roads – you enjoy using the roadway, but did not DIRECTLY purchase it

• Air Pollution Laws – you enjoy the benefit of cleaner air

Examples of Negative Externalities• Negative externalities can lead to Market

Failures• Loud Music – you are losing sleep because

your neighbor purchased new speakers• Courtyard lunch ban – other students left

trash, but now you cannot be in the courtyard during lunch.

• Pollution – a private plant opens a block away and you’re affected negatively by it’s pollution

• Bar/Club – a new one opens near your house and drives down your home value

Governments Goals

• Promoting freedom, security, stability and growth

• Public Policies seek to maintain three things• HIGH EMPLOYMENT – gov’t pushes policies to

ensure unemployment rates are low• STEADY ECONOMIC GROWTH – each generation

seeks to increase it’s GDP• STABILITY – gives consumers, producers, and

investors confidence

Societal Government Regulations

• Specific Regulations that protect the nation as a whole or the PUBLIC INTEREST

• EPA -Pollution laws – disposing of oil , land fields• Food and Drug laws – set standards of production• FCC – regulates radio, TV, etc• OSHA – policies enacted to protect worker health• EEOC – Equal employment and education opportunity

laws• Banking Protection – prevents banks from closing w/o

returning money

Individual Government Regulations

• The gov’t establishes regulations to protect consumers and businesses

• Ex• Patents/ Copyrights – gov’t protection on

“ideas” and materials (books, movies, music, etc)

• Minimum Wage – set to protect workers• Product safety – put in place for the consumers

The exchange between Businesses and Individuals

• The Circular Flow – Exchange between the Product and Factor Markets

• Two versions• 1. Between Individuals & Businesses• 2. Between Individuals, Businesses &

Government

Circular Flow

• Businesses & Individuals• Factor Market – The exchange includes an

exchange of FACTORS (land, labor, capital) from the individuals to the businesses and an exchange of PAYMENT from businesses to individuals

• EX: The individuals provide a factor such as labor to the business and the business provides the individual with pay

Circular Flow

• Businesses & Individuals• Product Market = This includes an exchange

of GODDS/SERVICES from the businesses to the individuals and an exchange of PAYMENT from the individuals to the businesses

• EX: The business sells a product to the individuals and the individuals give the business a payment for that product