1. The Role of Government

2. Private Goods
Most goods and services that businesses produce are private goods or goods that, when consumed by one individual, cannot be consumed by another
Subject to the exclusion principle
Person is excluded, or prevented, from using that good or service unless he or she pays for it
Private goods are the items we buy and replace
Goods-Clothes and Food
Services-Insurance, haircuts, medical services, auto care, and telephone services

3. Public Goods
Goods that can be consumed by one person without preventing the consumption of the good by another
Subject to the nonexclusion principle
No one is excluded from consuming the benefits of a public good whether or not he or she pays
Examples include public parks, public libraries, museums, highways & street lighting

4. Who produces them?
Private- Businesses (Cars, Insurance, Clothes, Food, Medical Services, etc)
Public- Government
Why? Difficult to charge for them!
Private sector would not provide them in adequate amounts because it is so difficult to get people to pay for them
Government raises money through taxes
Uses taxes to provide Public Goods

5. Externalities
Unintended side effect of an action that affects someone not involved in the action
Company pays end-of-year bonuses to its workers
Restaurants and stores in the area will probably see their sales go up b/c the workers have more money to spend
These businesses experience externalities; not involved in paying the bonuses, but they were affected by it

6. Positive Externalities
Government provides public goods because they produce positive externalities
Good Roads- benefits drivers, make it cheaper to transport goods, and those goods can sell at a lower price, benefitting everyone
1960s-Government wanted to put a man on the moon, and the space program needed someone to develop smaller computers to achieve this goal
Provided money to researchers who developed tiny computer chips, and today those chips are found in calculators, cars, household appliances and cell phones

7. Negative Externalities
Externalities can be negative when an action harms an uninvolved third party
EXAMPLE: Chemical company tries to cut costs by dumping poisonous waste into a river; people who relied on the river water would suffer pollution, a negative externality
Government has a role in preventing these and other kinds of negative externalities

8. Maintaining Competition
What does a Free-Market, Capitalist economic system need to work best?
Competition!
Several parties competing in the market for different goods & services

9. Monopolies Sole provider of a good or service
Markets work best when there are large numbers of buyers and sellers
Markets may become controlled by Monopolies
Monopolies=No competition!
With no competition, a Monopoly may charge any price it wants
Who suffers? Consumers

10. How do we prevent Monopolies?
ANTITRUST LAWS
Laws designed to control monopoly power and to preserve & promote competition
Sherman Anti-Trust Act (1890)
Banned monopolies and other forms of business that prevented competition
1911-Used by government to break up the Standard Oil Company, which had a monopoly on oil
1980s-Regulated American Telephone and Telegraph (AT&T), creating more competition in telephone service

11. Antitrust Laws Clayton Act (1914)
Passed by Congress to clarify the Sherman Act
Prohibited a number of business practices that lessened competition
Example-Charging high prices in an area where little competition existed
Restricted the use of injunction against labor unions, while also providing legal support to peaceful strikes and boycotts

12. Mergers Combination of two or more companies to form a single business
Government may step in to prevent it
Staples and OfficeMax, two leading office-supply stores, wanted to merge, the federal government prevented it
Argued that a merger of these two giant firms would result in less competition and higher prices for consumers
Did not prevent the 2001 merger of Hewlett-Packard and Compaq Computer, two leading personal computer makers

13. Regulating Market Activities
Governments want to reduce negative externalities
Regulate some activities by businesses
Should the Government do this?
Government agencies make sure that businesses act fairly and follow the laws

14. Natural Monopolies
Market situation in which the costs of production are minimized by having a single firm produce the product
In exchange for having the market all to itself, the firm agrees to government regulation
Natural Gas and Water are delivered by single firms b/c of this

15. Natural Monopolies
Large size of most natural monopolies give them economies of scale
They could produce the largest amount for lowest cost
Advances in technology are making these industries more competitive, leading government to make moves to deregulate and open natural monopolies up for competition
Why would Government deregulate these monopolies?

16. Regulating Ads & Product Labels
Government involved in guaranteeing Truth in Advertising and Product Labeling information
Food and Drug Administration (FDA) deals with the purity, effectiveness, and labeling of food, drugs and cosmetics
Federal Trade Commission (FTC) deals with problems of false advertising and product claims; administers antitrust laws forbidding unfair competition and price fixing
Because of FTC, cigarette manufacturers must place a health warning on cigarette packages

17. Product Safety
Recall
When a company pulls a product off the market or agrees to change it to make it safe

18. Review Private v. Public Goods Who produces Public Goods? Why?
Externalities
Positive & Negative
What is a Monopoly?
How does Government maintain healthy competition?
Exception---Natural Monopolies
Government Regulation---Reducing Negative Externalities, Natural Monopolies, Ads & Product Labels, Product Safety