The Government’s Role in Our Economy Chapter 16 The Government’s Role in Our Economy

Section 1: Government Intervention in the Economy Our U.S. economy is a capitalistic economy. Private citizens own and use the factors of production to seek a profit. Free Enterprise is another term to describe our economy. Competition is allowed to flourish in our economy with little or no government interference. Economic freedom: The freedom to own property, make a profit, and to make choices about what to produce, buy, and sell.

Consumer Driven In our economy the consumer is very important and is known as the sovereign, they are the “king” or ruler of the economy Capitalism thrives on competition - the struggle between buyers and sellers to get the best products at the lowest prices Competition rewards the most efficient producers Why?

Adam Smith is known as the father of economics The Wealth of Nations (written by Adam Smith) described the principles of economics for the first time Smith believed that the government should let the economy run itself. Laissez-faire, “to let do”, “hands off” Government should not interfere in the market place

Reasons the gov’t is involved in the economy Businesses have sometimes earned profits unfairly. Working conditions have sometimes been unsafe and inhumane. Unsafe products have harmed consumers. Not all Americans have had economic security. The economy has been unstable. The environment has been damaged.

Methods governments use Regulate businesses Make direct payments to individuals Own resources and produce goods and services Help pay for important economic activities Control the amount of money they spend and the amount they receive in taxes Make tax rules and collect special taxes

Government Intervention Place limits on individual freedoms Affects our freedom to buy and sell, to make a profit, and to do as we wish with our own property Taxes Used to pay for government programs, but take large parts of citizen’s incomes The question is: How much should the government regulate business?

Section 2: Government’s Efforts to Solve Economic Problems Government plays several important roles in our economy One role is to provide goods and services that private businesses do not provide Most goods and services that businesses provide are called private goods Goods that when consumed by one individual cannot be consumed by another Consumption of private goods is subject to the exclusion principle A person is excluded from using that good or service unless they pay for it

The government offers public goods Goods that can be consumed by one person without preventing the consumption of the good by another Consumption of public goods is subject to the non-exclusion principle No one is excluded from consumption whether they paid or not Examples: libraries, public parks, museums, highways Government provides these services because private businesses would not. They wouldn’t make a profit. How does the government pay for these services?

Maintaining Competition Markets work best when there are a large number of buyers and sellers An oligopoly is a market situation where a few firms control the market Auto industry, Cell phone networks A monopoly is where one person or company is the sole provider of a good or service Why would this not be beneficial to consumers?

The government will try to deal with monopolies through antitrust laws These are laws that try to control monopoly power and preserve and promote competition In 1890 the Sherman Antitrust Act banned monopolies and other business combinations that prevent competition Standard Oil Company in 1911 AT&T in 1981

Sometimes in our economy it makes sense to have a monopoly This will often lead to a natural monopoly Market situation in which costs of production are minimized by having a single firm produce the product The firm must agree to be regulated by the government Gas, electricity and water are usually delivered by natural monopolies

Other government roles Government also plays an important role when it comes to advertising and product labeling The Federal Trade Commission (FTC) deals with problems of false advertising and product claims The Food and Drug Administration (FDA) deals with the purity, effectiveness, and labeling of food, drugs, and cosmetics.

Product safety is another important role that the government plays in our economy The Consumer Product Safety Commission (CPSC) recalls products that pose a safety hazard Cars? The Environment Protection Agency (EPA) regulates how much and what kind of pollution can be dumped into the environment.

Protecting Workers Government also protects workers in the workplace OSHA - enforces safety and health standards in the workplace The Jungle – Upton Sinclair Government provides economic security (or assistance) Social Security - monthly payments that go to a worker or their family if that worker retires, becomes injured or dies. Welfare SNAP - Food Stamps

Section 3 Managing the Economy Government decisions about how much money it spends and the amount it collects in taxes are referred to as fiscal policy Fiscal policy affects the economy because the government spends tax revenues on different expenditures like Social Security, Medicare, Military, Highways, etc. The federal budget is the government’s play for how money will be raised and spent Who proposes it? Who approves it?

Social Security was the largest single spending category for the government This expense is only expected to keep growing in the near future Why? Remember Chapter 1… Medicare is also likely to rise - 4th largest expenditure National defense is the 2nd largest category of federal expenditures

The federal government usually runs a budget deficit, meaning that they bring in less revenues than they spend in expenditures A surplus is the opposite...spending is less than revenues The total amount of money that the government owes to lenders is called the national debt. Interest and federal budget?

The government also tracks inflation A general rise in price level of goods to see how fast prices are rising GDP (Gross Domestic Product) is also measured by the government Total dollar value of all final goods and services produced in a year within the country Helps the government determine how well (or not so well) our country’s economy is doing If inflation is up and GDP is down, the country is not doing very well