ECONOMICS: GOVERNMENT AND THE ECONOMY Mr. Irwin---Heritage High School

Important Vocabulary  Regulation  Eminent Domain  Regulatory Agency  Merger  Deregulation  Common Resource  Government Failure  Poverty Rate

Government Involvement  Government plays a role in economy  Should it?  Is it allowed to intervene?  Yes—Article I of the Constitution  Allows Congress to perform a variety of tasks  Lay and collect taxes  Borrow money  Regulate interstate and foreign commerce  Coin money and regulate its value

Regulation  Government establishes laws and rules designed to influence economic behavior in desirable ways  Known as “regulation”  What do you think? Is this right?  Turn to a partner and share

Protecting Property Rights  Comes from Constitution  Essential for free enterprise system  Why? Incentives matter  Ownership:  Encourages people to care about property  Encourages productive use of property  Encourage development of property in ways that benefit others  Exception: Eminent Domain  Power to force transfer of property to gov.

What Regulatory Roles?  Maintaining Competition  Justice Department  Federal Trade Commission Regulatory Agency---makes and enforces standards for an industry or area of economic activity  Common crimes  Price fixing  Bid rigging  Market division  Monitors mergers---illegal if it lessens competition

What Regulatory Roles?  Protecting Consumers, Savers, and Investors  “Caveat Emptor”  The Jungle  Unsafe at Any Speed  Investors  Federal Deposit Insurance Corporation (FDIC) insures all bank deposits for up to 100k per depositor

What Regulatory Roles?  Protecting Workers  Department of Labor (DOL)  OSHA---Occupational Safety and Health Administration Sets safety and health regulations for industries Examples: Construction workers wearing helmets, highway workers wearing reflective vests  Established in 1971, workplace fatalities have decreased by more than 60%

Perils of Government Regulation  Problems can occur  Overregulation  Regulation itself can be expensive  Can actually hinder economic activity Construction worker may abandon job in order to avoid certain regulations  Balancing costs and benefits Everyone likes clean water, but how clean does it NEED to be?  Regulatory capture—too close with the industry

Addressing Externalities and Public Goods  Supporting Positive Externalities  Subsidies---college grants and low interest loans  Vouchers  Public provision—government chooses to finance the production of a good or service itself Postal service, air traffic control systems  Limiting Negative Externalities  Command and control policies---rules and enforcement  Market based policies---rely on incentives

Tragedy of the Commons  Negative externalities happen when property rights are not well defined  Example: Air----common resource  Can be overused and destroyed  Called the Tragedy of the Commons

Preserving Common Resources  Government may decide to preserve common resources  Tolls  Can be a corrective tax  Quotas  Turn public resource into a private one--- Privatization  Example: Overfishing

Promoting Economic Well-Being  Promotes economic stability---widely accepted currency  Stimulate economic activity through tax incentives  Economic stimulus packages  Income redistribution through antipoverty programs  Progressive taxation  Welfare programs  Food stamps, public housing, school lunches  Earned Income Tax Credit  Any unintended consequences?