The GovernmentsRoll in TheMarketEconomy

Essential Standards

The student will describe the role of the government in a market economy.

The student will explain why the government provides public goods and services and resolves market failures.

The student will explain how productivity, economic growth, and standard of living are influenced by investment in the health, education and training of people.

The student will give examples of government regulation and deregulation and their effects on consumers and producers.

Public Goods A public good is a

good or service for which it would be impossible to EXCLUDE non-payers.

It would not be possible to exclude poor people from roads, sidewalks, public schools…

Or from the protection of national defense, police protection, etc.

Public and Private The Public Sector

—the part of the economy that produces and maintains public goods.

The Private Sector—involves transactions of private businesses and individuals.

Which of the following is not an example of a public good?

A.) Kennesaw battlefield walking trails

B.) Powder Springs Police Department

C.) Town Center Mall

D.) Local Library

The Free Rider ProblemThe Free Rider Problem Public goods are necessary Public goods are necessary

due to the “due to the “Free RiderFree Rider” ” problem…problem…

Public goods are usually Public goods are usually impossible for a private impossible for a private business to establish a business to establish a one-one-to-one link between payment to-one link between payment & receipt.& receipt.

Suppose an area has a Suppose an area has a terribleterrible mosquito problem… mosquito problem…

An entrepreneur decides toAn entrepreneur decides to spray spray area ponds and area ponds and swamps toswamps to control the control the problem…problem…

And asks area customers to And asks area customers to paypay $25.00 $25.00 for the servicefor the service..

What would happen?What would happen?

Another Another Example Example

of the of the “Free “Free Rider”Rider”

Some people, if given the option, would not choose Some people, if given the option, would not choose to pay for to pay for fire protection…fire protection…

But if their house were to catch fire, it could But if their house were to catch fire, it could spreadspread to yours…to yours…

So the government has decided to provide fire So the government has decided to provide fire protection to protection to everybody.everybody.

Whether they want to pay for it or not.Whether they want to pay for it or not.

Market Failure The “free rider”

problem is an example of market failure—

A situation in which the free market does not provide a good or service efficiently.

When market failure occurs…

It is usually best for the government to begin providing that good or service.

Externality:Externality:An economic side effect An economic side effect of a good or service that of a good or service that

generates generates benefits or benefits or costscosts to someone other to someone other

than the person who than the person who decides how much to decides how much to produce or consumeproduce or consume..

Positive Externality Externalities that benefit

everybody—not just those who have paid—are called…

Positive Externalities. Example—Mrs. Garland

buys an old house that is an eyesore in the neighborhood…

She fixes it up, repaints it, plants flowers, etc.

Her neighbors were not involved in this decision…

But they benefit because the neighborhood looks nicer…property values have risen, etc.

Negative Externality Some decisions to produce

goods and services generate unintended costs…

Negative Externalities cause part of the cost of production to be paid for by someone other than the producer.

Example—a tire factory is constructed near a river in Florida. Many businesses nearby sell tubes and concessions to swimmers…

The river becomes polluted and unswimmable…those businesses shut down…the community economy goes into a tailspin.

Which of the following is an example of a positive

externality?

A.) All of my neighbors take care of their lawn and my property value increases.B.) Cobb county schools lose accreditation and my property value decreases.C.) A new interstate is built right next to my property and the value goes down.

The Government’s Role1. Is to encourage positive

externalities… A well-educated workforce

benefits all of society— So the government

provides public education.2. And discourage negative

externalities… Air pollution harms

everybody…pollution controls discourage that from happening.

Deregulation In the 1960’s and 1970’s, many

businesses argued that government regulation and oversight was hurting competition and driving up prices…

That government should “get out of the way”…

And allow the “invisible hand” to regulate the market.

Deregulation led to lower prices and more choices for consumers…

Airline deregulation led to a 30% drop in prices between 1974 and 1994…

But banking deregulation is partly to blame for the recent economic collapse.

The Poverty ThresholdThe Poverty Threshold► The PovertyThe Poverty ThresholdThreshold——

an income level below an income level below that which is needed to that which is needed to support families or support families or households.households.

► In 2008, the line for a In 2008, the line for a single parent with one single parent with one child was child was $14,051…$14,051…

► For a four-person family For a four-person family with two children-with two children---$22,025.$22,025.

► Poverty is the result of Poverty is the result of unequalunequal distribution of distribution of wealth.wealth.

Welfare

• Welfare—government aid for the poor.• The system began under Franklin

Roosevelt during the Great Depression…• And was expanded by Lyndon Johnson in

the 1960s’ War on Poverty.

Cash Transfers

In some cases, states and the federal government make direct payments to the poor.

1. Temporary Assistance for Needy Families—money is limited and the aim is to move people from welfare to work.

2. Social Security—established 1935. Payroll taxes are collected and distributed to retirees and the disabled.

3. Unemployment Insurance—workers must prove they have made efforts to find work each week they receive benefits.

4. Workers’ Compensation—provides state funds to workers injured on the job.

Other Kinds of BenefitsOther Kinds of Benefits►In-kindIn-kind benefits— benefits—

goods and services goods and services provided at free or provided at free or reduced prices.reduced prices.

►MedicalMedical—for the poor —for the poor (Medicaid) and the (Medicaid) and the elderly (Medicare).elderly (Medicare).

►EducationEducation—funds are —funds are provided to the poor provided to the poor from preschool to from preschool to college.college.

The government should increase taxes on the wealthy to provide more welfare and

assisstance for the poor.A.) Yes

B.) No