1. Government and the Economy
Unit 11
Essential Question:
How should the U.S. government carry out its economic roles?

2. The government, the economy, and you
Laissez-faire economics – government should stay out of the economy…let market forces (supply & demand) run it.
Thomas Jefferson – “The gov’t that governs least, governs best.”
Tea party – Says to the gov’t, “Just leave me alone.”
But, gov’t is everywhere (read: “gov’t & you this a.m.”)
Can gov’t get involved in economy? We must look at the…
…Constitution:
Gov’t can: tax, “provide for the general welfare”, borrow, regulate interstate & foreign trade, handle bankruptcy, coin $, set weights/measures, handle patents & inventions
So, gov’t sets regulations – rules set/enforced by the government

3. Property rights
We value private property in America. It gives incentives to…
…work hard and be productive to earn things.
Compare this to a communist country – what your earn/make goes to the government, not you.
Government protects property rights…
The law protects if someone takes from you
U.S. Patent and Trademark office protects “intellectual property”
Gov’t can also TAKE private property
Eminent Domain (Fifth Amendment) – gov’t can take private property if it’s “for public use”.
They must pay market value. Think of a highway going through and a house is in the way.

4. Regulation We value private property & gov’t leaving us alone, but…
…the gov’t still regulates.
Example: gov’t ensures there is competition (not a monopoly). Gov’t forbids/regulates…
Price fixing – “competitors” agree on a price (collude or collusion)
Bid rigging – instead of competing bids, they work together to bid low
Market division – agree to split the market, like splitting areas
Mergers – we don’t want them to merge b/c we’ll get too few competitors (think airlines, phone companies—there’s only a few right now, if they merged there would be VERY few)

5. Good & Bad of Regulation
Helps with competition
Protection (think FDIC and insurance of deposits in banks)
Safety (think seatbelts, EXIT signs)
Bad
Businesses say many regulations are unnecessary; they get in the way
Deregulation sometimes results. It’s scaling back the regulations (this is a hot topic between Democrats and Republicans)

6. Externalities & common goods
Externalities – extra or spillover effects of production/consumption
Like factory pollution
Gov’t regulates externalities
Command-and-control policies – simply is strict rules
Market-based policies – are preferred b/c they try to put incentives to work, like…
Setting a fee per garbage bag (incentive to make less trash)
Setting an “OK-up-to” limit on pollution (incentive to stay below the OK level)
Giving $, called subsidies, to encourage something
Key here: $ amounts put to use

7. Commons goods
Some things are not privately owned, but are common, like…
…air, fish in the ocean, stone crabs
Tragedy of the commons – resources can be easily overused and ruined (think cows in the common pasture)
It’s hard for gov’t to regulate these things; community groups might be better at it.