Fundamentals Part 4 Role of the Government in the Economy SSEF5

THE ROLE OF GOVERNMENT As a protector, a government may pass and enforce laws meant to prevent the abuse of consumers and workers. Governments are both providers and consumers. The U.S. government provides education and welfare and is the second largest consuming group in the economy after consumers.

As a regulator, the government works to preserve competition. The promoting of national goals is an important role of any government. In the U.S., achieving economic equity and security has resulted in a mixed economy, or modified private enterprise economy.

Protecting Ownership Rights Because a market system is based on individuals having a right to own property and choosing what to purchase their legal rights to these things must also be protected. Examples: contracts, patents, copyrights

Private v/s Public Goods & Services Private Goods/Services are those things that you take on all costs and benefits for. -examples: car, house, pizza Public Goods/Services are those things that cost and benefits are shared by all those in society - school, roads, parks

Providing for the less fortunate Redistribution of Income: -the idea that a society should help those who are less fortunate (poor, disabled, elderly) - we use tax collections to provide services through transfer payments (money given without a requirement of anything in return

Competition For a market economy to work best their must be competition in the market which is why the government prevents monopolies. You might recall examples from US History like Carnegie Steel and Standard Oil The USA prevents both monopolies and trusts.

Competition Monopolies: Control all the resources in a business either horizontally or vertically -In 1984 AT&T was broken up because they had a monopoly on phone service Trusts: a group of companies that combine their resources to control the market. - The United States passed anti-trust laws in the 1890’s

What happens when the market fails? The market failure occurs when the private company benefits from productions that costs others. Examples: A company is making profits for the production of pharmaceutical goods but they are dumping chemical waste into a nearby river causing the local residents to get sick endure medical bills and the cost of cleaning up the river.

Regulation v/s Deregulation Regulation Using laws to control what businesses can and can not do Meant to increase public benefits and reduce instances of market failure Examples: fines for polluters, safety laws, and price ceilings Advantages: safety, lower prices Disadvantages: lower quality, higher costs Deregulation Means that restrictions have been removed Advantages: more competition and lower prices Disadvantages: businesses are driven out and higher prices

Circular Flow Model/Diagram Subsidies Goods & Services Taxes Goods & Services Transfer Payments Taxes