Ch. 23 Section 1 The Role of Government

Private Goods, Public Goods Private Goods – are goods that when consumed by one individual cannot be consumed by another Consumption is determined by the exclusion principle – person is prevented from using something until they pay for it Businesses produce mostly

Private Goods, Public Goods (cont.) Public Goods – goods that can be consumed by one person without preventing consumption by another. Consumption is determined by the non-exclusion principle – no one is excluded from use whether or not they pay for it. Difficult to charge for public goods, private sector does not provide; Government must meet the needs of the people; pays with peoples’ taxes

Dealing With Externalities Externality – unintended side effect of an action that affects someone not involved in the action. Public goods from the government produce positive externalities Government tries to encourage positive externalities and prevent negative externalities

Maintaining Competition Markets work best when there are many buyers and sellers Monopolies can be very harmful to the market Antitrust laws – intended to control monopoly power and to preserve and promote competition Sherman Antitrust Act of 1890 banned monopolies that prevented competition; used to break up Standard Oil (1911) and AT&T (1984).

Maintaining Competition (cont.) Merger – combination of two or more companies to form a single business If the government feels a merger would result in less competition and higher prices for consumers, it may stop the merger. Hewlett Packard & Compaq = little resistance Staples & Office Max = Gov’t said NO

Regulating Market Activities Government regulates some business activities to reduce negative externalities Makes sure businesses act fairly and follow the laws Sometimes it makes sense to have a single firm produce all of the goods or services for a market

Regulating Market Activities (cont.) Natural Monopoly – market situation in which the costs of production are minimized by having a single firm produce the product. To prevent abuses, government heavily regulates the sole provider Ex. Utility companies (water, electricity, mail delivery, telecommunications)

Regulating Market Activities (cont.) The government requires truth in advertising and product labeling. Federal Trade Commission (FTC) and Food and Drug Administration (FDA) FTC deals with false advertising and product claims; FDA enforces the purity, effectiveness, and labeling of food, drugs, and cosmetics

Regulating Market Activities (cont.) The government regulates product safety. The Consumer Product Safety Commission (CPSC) recalls unsafe products. Recall – when a company pulls the product off the market or agrees to change it to make it safe.