Role of GovernmentRole of Governmentin a Market Economyin a Market Economy

Role of GovernmentRole of Government

Provide Public Goods & Services

Redistribute Income

Protect Property Rights

Resolve Market Failures

Regulation

Provide Public Goods & ServicesProvide Public Goods & Services Public Good Public Good – a good/service provided – a good/service provided

free to everyone - excludes no one from free to everyone - excludes no one from using itusing it

Impractical or impossible to charge for useImpractical or impossible to charge for use

One person’s use does not prevent or One person’s use does not prevent or reduce another persons usereduce another persons use

Problem: Problem: Free Riders Free Riders – someone who – someone who wouldn’t pay for the good/service but gets wouldn’t pay for the good/service but gets use if provided as public gooduse if provided as public good

Resolve Market FailuresResolve Market Failures Market Failure Market Failure – markets do not distribute – markets do not distribute

resources efficientlyresources efficiently

Free riders are an exampleFree riders are an example

Occurs because in private industry cost Occurs because in private industry cost >> benefit benefit to one individualto one individual

Government steps in to provide so that group Government steps in to provide so that group benefits exceed costbenefits exceed cost

Correct for Correct for externalitiesexternalities (side effects; over or (side effects; over or underproduction of goods)underproduction of goods)

Redistribute IncomeRedistribute Income Shifting income from those who have it to those who Shifting income from those who have it to those who

need it need it oror reducing what people need to pay for reducing what people need to pay for

Cash Transfer PaymentsCash Transfer Payments: direct payments of : direct payments of money without receiving a good/service in exchangemoney without receiving a good/service in exchange

EX: TANF, Social Security, Unemployment, Workers CompEX: TANF, Social Security, Unemployment, Workers Comp

Other programs: Other programs: In Kind benefits In Kind benefits

(food stamps) (food stamps) Medical assistance Medical assistance

(medicare/medicaid)(medicare/medicaid) Education Education

(grants, financial aid, free reduced lunch, SAT waiver, AP (grants, financial aid, free reduced lunch, SAT waiver, AP Test subsidy)Test subsidy)

Protect Property RightsProtect Property Rights Protect legal ownership of resources including right Protect legal ownership of resources including right

to own or sell them – both physical & intellectualto own or sell them – both physical & intellectual

Create incentive for people & firms to create ideas Create incentive for people & firms to create ideas & goods, innovations, invest in the future& goods, innovations, invest in the future

Send signals of who to reward for care of resource Send signals of who to reward for care of resource & who to punish for misuse; encourages wise use & & who to punish for misuse; encourages wise use & protection of resourceprotection of resource

Examples:Examples: Copyright lawsCopyright laws TrademarksTrademarks Increased property valuesIncreased property values

RegulationRegulation

Maintain competition Maintain competition – – enforcing enforcing anti-trust lawsanti-trust laws

Control Control priceprice, , qualityquality and and outputoutput

Exs. Justice Dept v Microsoft, gas Exs. Justice Dept v Microsoft, gas company deregulation in GA, company deregulation in GA, public service commissionspublic service commissions

Societal DecisionsSocietal Decisions

3 questions of allocation:3 questions of allocation: What goods and services should be What goods and services should be

producedproduced? (determined by available ? (determined by available resources)resources)

How should these goods and services be How should these goods and services be produced? produced? (combination of factors of (combination of factors of production)production)

Who consumes these goods and Who consumes these goods and services? services? (distribution decisions)(distribution decisions)

Economic concept that leads to Economic concept that leads to choices in any society:choices in any society:

SCARCITYSCARCITY

6 economic goals guiding society’s 6 economic goals guiding society’s choice of systems:choice of systems: Economic EfficiencyEconomic Efficiency

Making the most of resourcesMaking the most of resources Economic FreedomEconomic Freedom

Freedom from government interventionFreedom from government intervention Economic Security & PredictabilityEconomic Security & Predictability

Assurance that goods and services will be availableAssurance that goods and services will be available Provision of a safety netProvision of a safety net

Economic EquityEconomic Equity Fair distribution of wealthFair distribution of wealth

Economic Growth & InnovationEconomic Growth & Innovation Innovation leads to growthInnovation leads to growth Growth leads to higher standard of livingGrowth leads to higher standard of living

Other goalsOther goals?? Environmental protection; universal healthcareEnvironmental protection; universal healthcare

Four main types of economic Four main types of economic systemssystems

TraditionalTraditional Relies on habit, custom, or ritual to answer 3 Relies on habit, custom, or ritual to answer 3

questionsquestions Command/Centrally PlannedCommand/Centrally Planned

Government decides how to answer 3 questionsGovernment decides how to answer 3 questions Market/Free EnterpriseMarket/Free Enterprise

Individuals and firms answer the 3 questionsIndividuals and firms answer the 3 questions MixedMixed

Market-based systems in which the government plays a Market-based systems in which the government plays a rolerole

Along a continuumAlong a continuum