Ch. 23Ch. 23Section 1Section 1

The Role of GovernmentThe Role of Government

Private Goods, Public GoodsPrivate Goods, Public Goods

Private Goods – Private Goods – are goods that when are goods that when consumed by one individual cannot be consumed by one individual cannot be consumed by anotherconsumed by another

Consumption is determined by the Consumption is determined by the exclusion exclusion principle – principle – person isperson is prevented from using prevented from using something until they pay for itsomething until they pay for it

Businesses produce mostlyBusinesses produce mostly

Private Goods, Public Goods Private Goods, Public Goods (cont.)(cont.)

Public Goods – Public Goods – goods that can be consumed by one goods that can be consumed by one person without preventing consumption by another.person without preventing consumption by another.

Consumption is determined by the Consumption is determined by the non-exclusion non-exclusion principle – principle – no one is excluded from use whether or not no one is excluded from use whether or not they pay for it.they pay for it.

Difficult to charge for public goods, private sector does Difficult to charge for public goods, private sector does not provide; Government must meet the needs of the not provide; Government must meet the needs of the people; pays with peoples’ taxespeople; pays with peoples’ taxes

Dealing With ExternalitiesDealing With Externalities

Externality – Externality – unintended side effect of an action unintended side effect of an action that affects someone not involved in the action.that affects someone not involved in the action.

Public goods from the government produce Public goods from the government produce positive externalitiespositive externalities

Government tries to Government tries to encourage positive encourage positive externalities externalities and and prevent negative prevent negative externalitiesexternalities

Maintaining CompetitionMaintaining Competition

Markets work best when there are many buyers and Markets work best when there are many buyers and sellerssellers

Monopolies can be very harmful to the marketMonopolies can be very harmful to the market

Antitrust laws – Antitrust laws – intended to control monopoly power intended to control monopoly power and to preserve and promote competitionand to preserve and promote competition

Sherman Antitrust Act of 1890 Sherman Antitrust Act of 1890 banned monopolies banned monopolies that prevented competition; used to break up Standard that prevented competition; used to break up Standard Oil (1911) and AT&T (1984).Oil (1911) and AT&T (1984).

Maintaining Competition (cont.)Maintaining Competition (cont.)

Merger – Merger – combination of two or more companies combination of two or more companies to form a single businessto form a single business

If the government feels a merger would result in If the government feels a merger would result in less competition and higher prices for less competition and higher prices for consumers, it may stop the merger.consumers, it may stop the merger.

Hewlett Packard & Compaq = little resistanceHewlett Packard & Compaq = little resistance

Staples & Office Max = Gov’t said NOStaples & Office Max = Gov’t said NO

Regulating Market ActivitiesRegulating Market Activities

Government regulates some business activities Government regulates some business activities to reduce negative externalitiesto reduce negative externalities

Makes sure businesses act fairly and follow the Makes sure businesses act fairly and follow the lawslaws

Sometimes it makes sense to have a single firm Sometimes it makes sense to have a single firm produce all of the goods or services for a marketproduce all of the goods or services for a market

Regulating Market Activities (cont.)Regulating Market Activities (cont.)

Natural Monopoly – Natural Monopoly – market situation in which market situation in which the costs of production are minimized by having the costs of production are minimized by having a single firm produce the product.a single firm produce the product.

To prevent abuses, government heavily To prevent abuses, government heavily regulates the sole providerregulates the sole provider

Ex. Utility companies (water, electricity, mail Ex. Utility companies (water, electricity, mail delivery, telecommunications)delivery, telecommunications)

Regulating Market Activities (cont.)Regulating Market Activities (cont.)

The government requires truth in The government requires truth in advertising advertising and and product labeling.product labeling.

Federal Trade Commission (FTC) and Food and Federal Trade Commission (FTC) and Food and Drug Administration (FDA) Drug Administration (FDA)

FTC deals with false advertising and product FTC deals with false advertising and product claims; FDA enforces the purity, effectiveness, claims; FDA enforces the purity, effectiveness, and labeling of food, drugs, and cosmeticsand labeling of food, drugs, and cosmetics

Regulating Market Activities (cont.)Regulating Market Activities (cont.)

The government regulates product safety.The government regulates product safety.

The Consumer Product Safety Commission The Consumer Product Safety Commission (CPSC) recalls unsafe products.(CPSC) recalls unsafe products.

Recall – Recall – when a company pulls the product off when a company pulls the product off the market or agrees to change it to make it the market or agrees to change it to make it safe.safe.