Government and the Economy

Objectives:

Analyze the extent to which the U.S. government should protect property rights, establish regulatory roles, deal with market failures, and promote the economic well-being of Americans

Examine political cartoons to evaluate points of view about the roles of the U.s. government in the economy.

Express their views about how the U.S. government is carrying out its economic roles.

The Constitution outlines the federal government’s economic powers. All government regulation, the establishment of rules aimed at influencing the behavior of firms and individuals, is based on these constitutional powers.

The government protects private property rights through such institutions as the court system, police forces, and the U.S. Patent and Trademark Office.

At times, the government limits property rights through eminent domain, the power to take an individual’s property for pubic use if the owner is fairly compensated.

The federal government acts to maintain competition when markets fail to do so. It does this through regulatory agencies like the Justice department and the Federal Trade Commission, which create and enforce industry standards and regulations. These agencies prohibit practices that restrict competition and monitor activities that might lead to a merger, the combining of two or more separately owned firms.

The federal government also aims to protect consumers, savers, and investors. Regulatory agencies like the Food and Drug Administration work to ensure the safety of products as well as the financial security of savers and investors. The Department of Labor seeks to safeguard the interests and physical well-being of workers.

Some critics argue that the government regulates firms too much, causing a variety of economic problems. These critics call for deregulation, or the removal of government restrictions on firms’ economic activity to increase competition.

Investigate the de-regulation history of one of the industries listed below.

Airline industry

Telephone industry

Financial industry

What was the market structure of the industry before de-regulation?

When and why was the industry de-regulated?

How did de-regulation change the market structure of the industry?

What effect did de-regulation have on consumers? What impact did de-regulation have on the economy as a whole?

The government attempts to promote positive externalities such as higher education, which benefits society by creating a more productive workforce. When faced with negative externalities, economists prefer that the government implement market-based policies, such a s corrective taxes and cap and trade permits, which put the burden on the market rather than on society at large.

The government plays a role in preserving common resources, or resources everyone has access to, through tolls, quotas, and privatization. When common resources are overused or destroyed, economists call this a tragedy of the commons.

Governments must make choices as to which public goods they will provide. When government intervention causes a more inefficient allocation of resources than would otherwise occur, economists say there is government failure.

Since the Great Depression, the federal government has taken on more responsibility for economic well-being. It attempts to promote economic stability by maintaining a widely accepted currency and stimulating business activity during economic slowdowns.

The government also redistributes income to address poverty and to reduce the poverty rate, the percentage of the population whose family income falls below a certain level. To this end, the government coordinates many anti-poverty programs.