THE ROLE OF GOVERNMENT IN A MARKET ECONOMY Economics in Action NCEE National Council on Economic Education

Visual 5.1 The Role of Government in a Market Economy Provide a legal system Provide public goods Correct market failures Maintain competition Redistribute income Stabilize the economy

Visual 5.2 Economics Quiz with Answers Who wrote: “In this world nothing is certain but death and taxes”? Benjamin Franklin Who was the author of The Wealth of Nations? Adam Smith

Visual 5.2 Economics Quiz with Answers Who wrote The General Theory of Employment, Interest, and Money? John Maynard Keynes What does TNSTAAFL stand for? There’s no such thing as a free lunch

Visual 5.3 Public Goods Most goods and services are private goods and services A hamburger is a private good National defense is a public good

Visual 5.3 Public Goods Public goods differ from private goods because they have these characteristics: Shared consumption Nonexclusion Because people can consume public goods without paying for them, private businesses do not have incentives to produce enough public goods.

Visual 5.4 Externalities Market prices usually reflect the costs producers pay to produce goods and the benefits consumers receive. A kind of market failure happens when market prices fail to reflect all the cost and benefits involved. This is called an externality problem

Visual 5.4 Externalities Externality: When some of the costs or benefits are paid for by people who do not produce or pay for the product Positive Externality: Benefits enjoyed by someone who did not produce or pay for the product Negative Externality: Costs paid by someone who did not produce or pay for the product.

Life on Dismal Lake The Cast Mama Smith Papa Smith The Twins Snively Whiplash 15 additional families

Life on Dismal Lake Act 1 Is there an externality problem when the children throw the trash in the lake? How should this problem be solved?

Life on Dismal Lake Act II Is there an externality problem when Whiplash throws garbage into the lake? How should this problem be solved?

Life on Dismal Lake Act III Is there an externality problem when some unidentified families throw garbage into the lake? How should this problem be solved?