4. Role of the Government

Big Question

• What role does the government play in a mixed economy?

Learning Objectives

Students will be able to:

• Identify examples of market failures

• Differentiate between the private and public sector

• Define public goods

• Explain the free rider problem and why public goods can’t be provided by the private sector

• Define negative and positive externalities

• Explain the purpose of antitrust laws

• Identify how the government redistributes income

Government Involvement in the Economy

• Decisions on government involvement are essential for various sectors.

• Examples include:

  • Worker Safety Laws

  • Barber Shop Licenses

  • Bank Bailouts

Market Failure

Definition of Market Failure

• A situation where the free-market system fails to satisfy society’s wants (the invisible hand doesn’t work).

• This occurs when private markets cannot efficiently allocate resources.

• Result: Government intervention is needed to address these failures.

Four Types of Market Failures

1. Public Goods

2. Externalities

3. Imperfect Competition (Monopolies)

4. Inequality

• Government can intervene to allocate resources efficiently in these situations.

Public Sector vs. Private Sector

Definitions

• Public Sector: Part of the economy controlled by the government.

• Private Sector: Part of the economy run by private individuals and companies aiming for profit.

Public Goods

Necessity for Government Provision

• The free market impractically provides public goods due to insufficient profit opportunities.

• This relates to the Free-Rider Problem, where individuals benefit without paying.

Examples of Free Riders

1. Illegal music downloads

2. Watching street performers without payment

3. Jobless teenagers living at home

Issues with Free Riders

Consequences

• Free riders hinder firms from making profits.

• Essential services become underproduced in a free market.

Government Solutions

1. Implement penalties for free riders.

2. Use tax revenue to provide services to all.

Characteristics of Public Goods

1. Non-exclusionary: Cannot prevent people from enjoying benefits regardless of payment.

   • Example: National Defense

2. Shared Consumption (Non-rival): One person’s consumption does not reduce availability to others.

   • Example: City Park

Externalities

Definition of Externalities

• A third-party side effect affecting someone other than the original decision maker.

• Externalities can be positive or negative related to market failures.

Negative Externalities

Definition and Example

• Costs incurred by individuals not involved in the initial transaction.

• Example: Zoram, a pollution-producing chemical company, ignores the social cost of pollution.

• Result: Excessive production of harmful goods. Government may limit production to address these costs.

Positive Externalities

Definition and Example

• Benefits enjoyed by parties not involved in the transaction.

• Example: A vaccinated child benefits society by contributing to a healthier populace.

• Government may subsidize to encourage such beneficial actions (e.g., flu shots).

Economics of Pollution

Tragedy of the Commons

• Public goods tend to be polluted due to no incentive for upkeep.

• Examples include air, oceans, and public facilities leading to high spillover costs (e.g., over-fishing).

Monopolies

Antitrust Laws

• Designed to prevent monopolies and promote competition.

• Sherman Act of 1890 made monopolization a felony.

Importance of Antitrust Laws

• Monopolies eliminate competition, a vital aspect of free-market systems.

• Government intervention is necessary to redress this market failure.

Addressing Inequality

Government Actions

• Redistribution of income via taxation of individuals and businesses.

• Programs include:

  • Social Security

  • Medicaid

  • Food stamps

  • School lunch assistance

• Collectively known as welfare programs, aiming to mitigate the adverse impacts of poverty.