1. Market Failures and Role of Government

2. Inadequate Competition Mergers have resulted in fewer and larger firms. This can be good but can also decrease competition, which has consequences Inadequate resource allocation – Why would a company with no competitors have an incentive to use fewer resources? They wouldn’t! With monopolies, the government steps in and regulates utilities like electricity. Monopolies could restrict production to drive up prices Firms use their power and money to influence politics and further their own political careers; a business may demand a tax break; if the government doesn’t give it to them, they may threaten to leave the area

3. Inadequate Information Producers and consumers must have adequate information about market conditions; You may know a competitive salary for a secretary at a car lot, but would that salary be competitive if she was a secretary at an insurance company? If a business has additional funds, where should they invest it? If buyers can’t get adequate information about a product, that is a failure.

4. Resource Immobility When resources can’t or won’t move, this is a market failure - When the automobile industry collapsed in Detroit, many of the people did not move to other places to find jobs. Why? -When this happens, markets can’t run efficiently.

5. Externalities Externality – unintended side effect that either benefits or harms a third party not involved in it. - positive and negative externalities are both viewed as market failures -Negative externalities: A noisy race track is built close to your house, and causes your property value to go down; You had nothing to do with it, but it hurts your property value. -Positive externalities: That same noisy race track attracts more people to the area, which means the restaurants and shops in the area are busier. Restaurants and shops benefit from this even though they had nothing to do with bringing the people there, and the profits are not shared with the racetrack.

6. Public Goods Goods that are used by virtually everyone, but the use by one person does not diminish the satisfaction or value to others. Example: uncrowded highways, national defense This is considered a market failure because the they are not provided by the market because they can’t be withheld from people who don’t pay for them.

7. Government Regulation Government regulates monopolies such as electric companies; Government regulates mergers Government issues charters for corporations Government issues environmental standards; taxes factories that pollute

8. Public Disclosure Public disclosure is when the government requires businesses to reveal information to the public - Example: Food and Drug Administration (FDA) - Example: Government requires corporations who sell stock to reveal financial and operating information to shareholders and the Securities and Exchange Commission (SEC)

9. Examine the chart on page 180. Research these government agencies and determine how they affect business and you. Explain how the U.S. government is involved in the U.S. economy. Evaluate why various agencies are necessary or unnecessary. Do you believe that the government interferes too much? Explain using detailed analysis.