Government and the Economy Chapter 11 Essential Question: How should the U.S. government carry out its economic roles?

The government, the economy, and you Laissez-faire economics – government should stay out of the economy…let market forces (supply & demand) run it. Thomas Jefferson – “The gov’t that governs least, governs best.” Tea party – Says to the gov’t, “Just leave me alone.” But, gov’t is everywhere (read intro p207-208) Can gov’t get involved in economy? We must look at the… …Constitution: Gov’t can: tax, “provide for the general welfare”, borrow, regulate interstate & foreign trade, handle bankruptcy, coin $, set weights/measures, handle patents & inventions So, gov’t sets regulations – rules set/enforced by the government

Property rights We value private property in America. It gives incentives to… …work hard and be productive to earn things. Compare this to a communist country – what your earn/make goes to the government, not you. Government protects property rights… Law protects if someone takes from you U.S. Patent and Trademark office protects “intellectual property” Gov’t can also TAKE private property Eminent Domain (Fifth Amendment) – gov’t can take private property if it’s “for public use”. Think of a highway going through or widening and a house is in the way.

Regulation We value private property & gov’t leaving us alone, but… …the gov’t regulates us, our property, and businesses. Example: gov’t ensures there is competition (not a monopoly). Gov’t forbids/regulates… Price fixing – “competitors” agree on a price Bid rigging – instead of competing bids, they work together to bid low Market division – agree to split the market, like splitting areas Mergers – we don’t want them to merge, b/c we’ll get too few competitors (think airlines, phone companies—there’s only a few right now, if they merged there would be VERY few)

Good & Bad of Regulation Helps with competition Protection (think FDIC and insurance of deposits in banks) Safety (think seatbelts, EXIT signs) Bad Businesses say many regulations are unnecessary; they get in the way Deregulation sometimes results. It’s scaling back the regulations (it’s a hot topic between Democrats and Republicans).

Externalities & common goods Externalities – extra or spillover effects of production/consumption Think pollution or trash Gov’t regulates externalities Command-and-control policies – simply “thou shalt not” rules Market-based policies – are preferred b/c they try to put incentives to work, like… Setting a fee per garbage bag (incentive is to make less trash) Setting an “up-to” limit on pollution (OK to pollute up to a level) Giving $, called subsidies, to encourage something Key here: $ amounts put to use

Commons goods Some things are not privately owned, but are common, like… …air, fish in the ocean, stone crabs Tragedy of the commons – resources can be easily overused and ruined (think cows in the common pasture) It’s hard for gov’t to regulate these things; community groups might be better at it.