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The Economic Functions of Government

Council for Economics Education&

Henry B. Stobbs, MFA

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.

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CompetitionEconomic stabilizationExternality Income redistributionPublic goods & services

Concepts

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 (NCEE)

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.

Standards (NSCG, Grades 9 – 12)

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.

Objectives

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

Purpose

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


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


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


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


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


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


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


Please, assume your team configurations!

Activity Time

1. 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 ___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 ___

Classify the Headlines

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 B7. 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

Let’s Check!

Conservative Perspectives

versus

Progressive Points of View

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

CONSERVATIVE 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 unfair Support income redistribution

Progressive (Liberal) Perspective

Time for Another Activity

Economics is soooo dreamy!

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

Legislature Passes Funding for Subsidized Housing

Discussion Time

Time to Review

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.

Assessment

4. 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

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

6. Federal regulations now require Internet radio stations to pay substantial royalty fees (fees to artists and songwriters) fr 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: Extended Response

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 Check

4. 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 Check

These 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.

Assessment Check

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, plus up to 3 extra if submitted via Google Documents)

Homework

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

Works Cited