Economic Functions of Government

Q: What is the Government’s Role?

A: Set the Rules of the Game…

Maintaining Legal and Social FrameworkExample: Create laws and provide courts, provide information and services to help economy function better, establish a monetary system, define and enforce property rights. Framework only!

Eminent Domain (Kelo v. New London)

Eminent Domain

Providing Public Goods & ServicesExample: Provide goods and services that markets are unable or unwilling to provide, such as national defense.

Roads, Parks, Schools…Providing for Market Failures

Public Goods

Maintaining Competition

Example: Create and enforce antitrust laws; regulate natural monopolies.

Block Mergers that lessen competitive markets—prohibit collusion…

Maintaining Competition

Redistributing Income

Example: Higher income tax rates for rich than for poor, provide social security, and aid to dependent children, welfare, Medicare, Medicaid--Controversial!!

Kids economic future

Future of Social Security?

Correcting for Externalities

Externalities: negative or positive economic side effect. Implicit or explicit costs that spill over on other people or firms

Ex: Taxes to reduce negative externalities: such as penalties for environmental pollution; subsidies to encourage positive externalities, such as scholarships.

Correcting for - Externalities

Stabilizing the Economy

Example: Congressional budgets & spending and the money supply to promote economic growth, control inflation, and reduce unemployment.

Actions of the Federal Reserve & Bernake. Raise or lower interest rates or money supply

Greenspan in Retirement

National Debt

Last function—Spend YOUR $