The Economic Functions of Government

Council for Economics Education&

Henry B. Stobbs, MFA

Copyright Notice

Original Content 2008 Council for Economic Education and modified for classroom use by the author. Certain materials in this presentation are prepared with the fair use exemption of the U.S. Copyright Law and have been prepared with the multimedia fair use guidelines and are restricted from further use.

Concepts

• Competition• Economic stabilization• Externality• Income redistribution• Public goods & services

Standards (NCEE)

• Standard 16: There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

Standards (NCEE)

• Standard 20: Federal government budgetary policy and the Federal Reserve System’s monetary policy influence the overall levels of employment, output, and prices.

Standards (NSCG, Grades 9 – 12)

• I.B.4: The relationship of limited government to political and economic freedom.

• II.C.2: Character of American political conflict.• III.B.2: Major responsibilities of the national

government in domestic and foreign policy.

Purpose

The purpose of this lesson is to examine the economic functions of government.

Why do it?

Objectives

As a result of this lesson, you will be able to:1.Classify government economic activities

according to the six economic functions of government.

2.Analyze governmental economic actions within the liberal (progressive)/ conservative framework.

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income

Six Economic Functions of Government

1. Maintain the legal and social framework– Define and enforce property rights– Establish a monetary system

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition– Create and enforce antitrust laws– Regulate natural monopolies

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services– Public goods and services are those that

markets will not provide in sufficient quantities

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities◦ Reduce negative externalities◦ Encourage increased production of goods

and services that have positive externalities

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy– Reduce unemployment and inflation– Promote economic growth

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income◦ Redistribute income from people who have

higher incomes to those with lower incomes

Six Economic Functions of Government

1. Maintain the legal and social framework2. Maintain competition3. Provide public goods and services4. Correct for externalities5. Stabilize the economy6. Redistribute income

Activity Time

Please, assume your team configurations!

Classify the Headlines1. Federal Reserve Raises Key Interest Rate ___2. Congress Raises tax rates for Top Income

Brackets ___3. EPA Plan to Reduce CO2 Emissions ___4. Homeland Security Funding Increased ___5. President Says More Spending Will Fight

Recession ___6. Agency Blocks merger of Two Airlines ___

Classify the Headlines

7. City Police Increase Neighborhood Patrols ___8. Lawsuit Establishes Patent Rights ___9. Legislature Passes Funding for Subsidized Housing

___10. New Info from Government Agency Helps

Consumers Choose Wisely ___11. Songwriter Sues Singer: Says Songs Stolen ___12. County Funds Free Flu Vaccinations ___

Let’s Check!

1. Federal Reserve Raises Key Interest Rate E2. Congress Raises tax rates for Top Income

Brackets F3. EPA Plan to Reduce CO2 Emissions D4. Homeland Security Funding Increased C5. President Says More Spending Will Fight

Recession E6. Agency Blocks merger of Two Airlines B

Let’s Check!

7. City Police Increase Neighborhood Patrols C8. Lawsuit Establishes Patent Rights A9. Legislature Passes Funding for Subsidized

Housing F10. New Info from Government Agency Helps

Consumers Choose Wisely B11. Songwriter Sues Singer: Says Songs Stolen A12. County Funds Free Flu Vaccinations D

Conservative Perspectives

versus

Progressive Points of View

CONSERVATIVE PERSPECTIVE

• Government’s economic role is severely limited

• Economic and political freedom undermined by excessive reliance on government

• The government’s ability to solve social and economic problems is weak

• Faith in government to solve problems is unreasonable

Progressive (Liberal) Perspective

The market’s ability to solve complex social and economic problems is limited

Government can do a great deal to overcome weaknesses in the marketplace

Less concerned with the effects of government action on personal liberty

The price system is unfairSupport income redistribution

Time for Another Activity

Economics is soooo dreamy!

Legislature Passes Funding for Subsidized Housing

Let’s re-examine this headline. What would a progressive think of it? How would a conservative regard it?

Discussion Time

Time to Review

Assessment

Assessment

1. Public goods and services area) All goods and services paid for by the

governmentb) Goods and services provided by publicly held

companiesc) Goods and services that would not be

adequately provided by the market.d) Goods and services that are available to the

public.

Assessment

2. Establishing and enforcing clearly defined property rights is an example of government

a) Providing a social and legal framework.b) Maintaining competitionc) Providing public goods and servicesd) Redistributing income

Assessment

3. Smoke from a factory drops ash all over your car. Government’s economic function in this case is to:

a) Stabilize the economyb) Maintain competitionc) Provide public goods and servicesd) Correct a negative externality.

Assessment4. The Federal Trade Commission recommends that

the Smokin’ Hot Computer Corporation be broken into several smaller, independent companies. This is an example of the government’s function of:

a) Maintaining competitionb) Redistributing Incomec) Maintaining the Legal and Social frameworkd) Providing public goods and services

Assessment5. The Fed announced today that it will cut a key

interest rate by two basis points. This is an example of the government’s function to

a) Correct for externalitiesb) Stabilize the economyc) Redistribute incomed) Maintain the legal and social framework

Assessment: Extended Response6. Federal regulations now require Internet radio

stations to pay substantial royalty fees (fees to artists and songwriters) for the music they play. Some stations were not able to pay the fees and have gone “off the air.” What economic function of government is this an example of? Who benefits from the regulation? How? Why? Who loses because of the regulation? How? Why? What argument would you make for and against the regulation?

Assessment Check

Please trade papers with someone outside your team.

Assessment Check

1. Public goods and services area) All goods and services paid for by the

governmentb) Goods and services provided by publicly held

companiesc) Goods and services that would not be

adequately provided by the market.d) Goods and services that are available to the

public.

Assessment Check

2. Establishing and enforcing clearly defined property rights is an example of government

a) Providing a social and legal framework.b) Maintaining competitionc) Providing public goods and servicesd) Redistributing income

Assessment Check

3. Smoke from a factory drops ash all over your car. Government’s economic function in this case is to:

a) Stabilize the economyb) Maintain competitionc) Provide public goods and servicesd) Correct a negative externality.

Assessment Check4. The Federal trade Commission recommends that

the Smokin’ Hot Computer Corporation be broken into several smaller, independent companies. This is an example of the government’s function of:

a) Maintaining competitionb) Redistributing Incomec) Maintaining the Legal and Social frameworkd) Providing public goods and services

Assessment Check

5. The fed announced today that it will cut a key interest rate by two basis points. This is an example of the government’s function to

a) Correct for externalitiesb) Stabilize the economyc) Redistribute incomed) Maintain the legal and social framework

Assessment Check

Federal regulations now require Internet radio stations to pay substantial royalty fees (fees to artists and songwriters) for the music they play. Some stations were not able to pay the fees and have gone “off the air.” What economic function of government is this an example of? Who benefits from the regulation? How? Why? Who loses because of the regulation? How? Why? What argument would you make for and against the regulation?

Assessment CheckThese regulations are an example of government policy aimed at establishing and enforcing property rights. The protection of property rights is an element of the legal and social framework government establishes. In this case, singers and songwriters benefit from the legal protection in question; the regulation maintains their property rights and their incentive to produce music. Radio station operators and listeners lose, because there are fewer Internet radio stations and less choice for listeners.

Homework

Many city governments subsidize the construction of sports stadiums as a way to attract or hold on to sports teams. First, write an argument for this practice, using the economic functions of government to support your claim. Then present an alternative view, arguing against your initial claim. (20 points)

Works Cited

Council for Economic Education. “Lesson 4: What Are the Economic Functions of Government?” 2008 Council for Economic Education.