The Role of Government in a Market Economy

1. Provide a legal system Make and enforce laws and to protect private property rights. Make and enforce laws and to protect private property rights.

2. Maintain competition Regulate monopolies. Regulate monopolies.

3. Redistribute income Tax those with larger incomes and help those in need. Tax those with larger incomes and help those in need. Transfer payments Transfer payments

4. Reallocate resource. *Correct market failures *Address externalities ( unintended side effects to a third party uninvolved in the activity/AKA spillover costs and benefits). ( unintended side effects to a third party uninvolved in the activity/AKA spillover costs and benefits). *Public v. private goods

5. Stabilize the economy Reduce unemployment and inflation and promote economic growth. Reduce unemployment and inflation and promote economic growth. Fiscal (tax/spend) and monetary(money supply) policy Fiscal (tax/spend) and monetary(money supply) policy

Fiscal Federalism State and local governments have seen tax revenue dip State and local governments have seen tax revenue dip Shortfalls often covered by grants or transfers from Federal govt Shortfalls often covered by grants or transfers from Federal govt DEFINITION: system of intergovernmental transfers DEFINITION: system of intergovernmental transfers