The role of Government in the U.S. economy and Market Structures Chapters 3 & 7

What role should the government play in the economy?

Focus Lesson 2, activity 1

The American tradition of free enterprise Free Enterprise-The social and political commitment to giving the people the freedom and flexibility to try out their business ideas and compete in the marketplace.

The Basic Principles of the American Free Enterprise Several key characteristics make up the basic principles of free enterprise. 1. Profit Motive The drive for the improvement of material well-being. 2. Private property rights The right to control your possessions as you wish. 3. Competition The rivalry among sellers to attract consumers. Helps keep prices low

Promoting Economic Strength Policymakers (the government) pursue three main outcomes as they seek to stabilize the economy. 1. Employment Provide jobs for everyone who is able to work. An unemployment rate of 4-6% is desirable 2. Growth For each generation of Americans to do better than previous ones, the economy must grow to provide additional goods and services. How is your generation better off than your parents? 3. Stability Stability gives consumers, producers, and investors confidence in the economy and in our financial institutions, promoting economic freedom and growth. Ex: prices of milk

Focus lesson two, activity 2

Public Goods A public good is a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers. Funded by the public sector, the part of the economy that involves transactions of the government. Private Sector: the part of the economy that involves the transactions of individuals and business. A free rider is someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it is provided as a public good.

Market Failures A market failure is a situation in which the market, on its own, does not distribute resources efficiently. Would the free market ensure that roads are built everywhere they are needed?

Example of market failure Proposal: Farmers want a local river to be dammed Benefits: the dam will provide flood protection Cost: If an individual farmer were to build the dam, the cost to him would outweigh the benefits Decision: No. The farmers would collectively benefit from a dam, but no single farmer will build it.

Example of the creation of a public good Proposal: The government considers funding the dam Benefit: the dam will provide flood protection Cost: Higher taxes, changing ecosystem Decision: Yes. The government will fund the project Result: The benefits of the dam extend to so many people that their collective benefit exceeds the total cost of the dam. If farmers also wanted irrigation ditches built to carry the lake water to their fields, would the ditches be built as a public good?

Public or Private Good? Police Flood Control Rock Concerts Public Elementary school Court System College Education Parks Libraries Movie Tickets

Externalities A possible source of hydroelectric power Swimming An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume. The building of a new dam and creation of a lake generates: Positive Externalities Negative Externalities Loss of wildlife habitat due to flooding Disruption of fish migration along the river Overcrowding due to tourism Noise from racing boats and other watercraft A possible source of hydroelectric power Swimming Boating Fishing Lakefront views

Externalities: Positive or Negative? 1. Dynamo Computers hires underprivileged teens and trains them to be computer programmers. Those workers are then available to be hired by other companies, who benefit from the workers’ skills without having paid for them 2. The Enchanted Forest Paper Mill dumps chemical wastes into a nearby river, making it unsafe for swimming. The downstream city of Tidy Ville is forced to install special equipment at its water-treatment plant to clean up the mess. If the treatment costs is $20 per ton of paper produced, and the mill’s production cost is $100 (the cost of all the materials required to produce it) the full, or social cost of a ton of paper is $120. The community, not the polluter, winds up paying the $20 3. Your next-door neighbor takes up the accordion and holds Friday night polka parties in his backyard. Unfortunately, you hate polka music 4. Mrs. Garland buys an old house that is an eyesore in the neighborhood. She paints it, cuts the grass, and plants flowers. Her neighbors were not involved in the economic decision. But they receive benefits from it. Such as higher property values and a better view.

Focus lesson 2, activity 3

Providing a safety net While the free market has proven better at generating wealth than any other economic system, the wealth is spread unevenly throughout society. The government has created opportunities to assist the poor. Welfare Temporary Assistance for Needy Families (TANF) Social Security Unemployment insurance Workers’ compensation Medicare and Medicaid

Government and Competition Government policies keep firms from controlling the prices and supply of important goods. Antitrust laws are laws that encourage competition in the marketplace. 1. Regulating Business Practices The government has the power to regulate business practices if these practices give too much power to a company that already has few competitors. 2. Breaking Up Monopolies The government has used anti-trust legislation to break up existing monopolies, such as the Standard Oil Trust and AT&T. 3. Blocking Mergers A merger is a combination of two or more companies into a single firm. The government can block mergers that would decrease competition. 4. Preserving Incentives In 1997, new guidelines were introduced for proposed mergers, giving companies an opportunity to show that their merging benefits consumers.

Defining a Monopoly A monopoly is a market dominated by a single seller. Monopolies form when barriers prevent firms from entering a market that has a single supplier. Monopolies can take advantage of their monopoly power and charge high prices.

Different market conditions can create different types of monopolies. Forming a Monopoly Different market conditions can create different types of monopolies. 1. Economies of Scale If a firm's start-up costs are high, and its average costs fall for each additional unit it produces, then it enjoys what economists call economies of scale. An industry that enjoys economies of scale can easily become a natural monopoly. 2. Natural Monopolies A natural monopoly is a market that runs most efficiently when one large firm provides all of the output. 3. Technology and Change Sometimes the development of a new technology can destroy a natural monopoly.

Government Monopolies A government monopoly is a monopoly created by the government. Technological Monopolies The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time. Franchises and Licenses A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market. A license is a government-issued right to operate a business. Industrial Organizations In rare cases, such as sports leagues, the government allows companies in an industry to restrict the number of firms in the market.

Anti-Competitive Practices In addition to monopolies, other business activities may be considered illegal by the government. Collusion Collusion is an agreement among members of an oligopoly to set prices and production levels. Price- fixing is an agreement among firms to sell at the same or similar prices. Cartels A cartel is an association by producers established to coordinate prices and production.

Deregulation is the removal of some government controls over a market. Deregulation is used to promote competition. Many new competitors enter a market that has been deregulated. This is followed by an economically healthy weeding out of some firms from that market, which can be hard on workers in the short term.

Exploring Monopolies