Learning Objectives Explain why government is necessary in a Market economy Understand why government must provide public goods Explain why externalities are regulated by the government Apply your knowledge to the real life example of hydraulic fracking

What is an externality? What does he mean when he says: “There is no market solution in this case; the market is the problem”?

Externality Definition is the cost or benefit that affects a party who did not choose to incur that cost or benefit

What are the two mechanisms (tools) that government can use in dealing with externalities? (59-60)

A big role for the government is the creation of “public goods.” What are public goods and how do they resolve the problem of the “free-rider?” Discuss the examples of Basic Research, Law Enforcement and Parks. (72-74)

Public Goods Public goods are goods that have two characteristics: Non excludable Non rivalrous- use by one individual does not reduce availability to others Most economists say public goods must be provided by the government to avoid the free rider problem

Why are property rights (including copy right and patent law) so important? (66-67)

In what ways does government lower the cost of doing business? (69)

The author asks: “should government protect people from themselves?” What is the range of possible options? Explain some of the examples provided by the author. How would you answer this question?

Government and the Economy Government has six main functions: Maintaining Legal and Social Framework Example: Create laws and provide courts, provide information and services to help economy function better, establish a monetary system, define and enforce property rights. Maintaining Competition Example: Create and enforce antitrust laws; regulate natural monopolies.

Government Functions Correcting for Externalities Example: Taxes to reduce negative externalities, such as environmental pollution; subsidies to encourage positive externalities, such as education. Stabilizing the Economy Example: Use government budgets and/or the money supply to promote economic growth, control inflation, and reduce unemployment.

Government Functions Providing Public Goods and Services Example: Provide goods and services that markets are unable or unwilling to provide, such as national defense Redistributing Income Example: Higher income tax rates for rich than for poor, provide social security, and aid to dependent children, Medicare, Medicaid.

Fracking Advisory Groups source/teach--- social/the_lorax_externalities_hydraulic_fracturing.pd f?sfvrsn=2 source/teach--- social/the_lorax_externalities_hydraulic_fracturing.pd f?sfvrsn=2