1. The Government’s Role in Regulating Markets E. I can explain the role that the government plays in regulating markets. 1

2. The Role of Government  The government plays many roles in the marketplace.  These roles include:  Carrying out the constitutional responsibilities to protect property rights, contracts, and other business activities  Making sure that producers provide consumers with information  Protecting the health, safety, and well-being of consumers.  Regulation and Deregulation  When does the government regulate competition?  When the government sees that competition is being stifled in a particular industry, it will step in to regulate that industry.

3. Who and what does the government protect through regulations? Some government agencies regulate to protect  Consumers (e.g., Consumer protection Agency, Food and Drug Administration  Labor (e.g., Occupational Safety and Health Administration).  The environment (e.g., EPA).

4. Major Federal Regulatory Agencies  All of the agencies to the right represent ways the federal government intervenes in the marketplace.  Identify one agency meant to protect each of the following: (a) public safety, (b) fair competition, (c) equality.

5. Negative Effects of Regulation  Negative effects of government include:  Rules are costly to implement  Regulations stifle competition  Increased government spending in industries because the government has to hire workers to do the actual oversight

6. The Government’s Role  The government promotes innovation and invention to help maintain the country’s technological advantage by:  Funding research and development projects at universities  Establishing their own research institutions, like NASA  Granting patents and copyrights, which are an incentive to innovation

7. How does government enforcement of weights and measures affect consumer?  The government enforcement of weights and measures assures consumers that when they buy ten gallons of gas, are actually getting ten gallons.

8. Government regulation of contracts and how this affects consumers…  A contract is a legal agreement enforceable by law.  People would have less confidence in contracts if there were no guarantee of enforcement. Thus people would be less willing to trust contracts to buy, sell, or invest. This would reduce economic activity.

9. How do property rights and the contract enforcement affect economic activity?  Property rights, contract enforcement, standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services. http://www.youtube.com/watch?v=A_Qkbvh0y7k

10. When does the government regulate competition?  Sometimes the government takes steps to promote competition because markets with more competition have lower prices.  The government does this through:  Antitrust laws  Approving or not approving mergers  Deregulation

11. Government and Competition  The federal government has policies, known as antitrust laws, to keep firms from gaining too much market power.  The Federal Trade Commission and the Department of Justice’s Antitrust Division watches firms to make sure they don’t unfairly force out competitors.

13. Regulating Microsoft  The government can regulate companies that try to get around antitrust laws.  In 1997 the Department of Justice accused Microsoft of using its near-monopoly over the operating system market to try to take control of the browser market.  A judge ruled against Microsoft. The case was finally settled in 2002. Microsoft could not force computer manufacturers to provide only Microsoft software on new computers.

14. Blocking Mergers  The government has the power to prevent the rise of monopolies by blocking mergers.  The government also checks in on past mergers to make sure that they do not lead to unfair market control.  The government tries to predict the effects of a merger before approving it.

15. Corporate Mergers  Some mergers can benefit consumers.  Corporate mergers will lower average prices, which leads to:  Lower prices  More reliable products and services  More efficient industry

16. Deregulation  Some government regulation was seen to reduce competition, which led to the deregulation of some industries.  Over several years, the government deregulated:  Airlines  Trucking  Banking  Natural gas  Railroad  Television broadcasting  When Americans began the massive shift to cell phones instead of landlines after telephone deregulation, people in areas with poor cell phone coverage were out of luck. Those may be the same areas where deregulated cable TV companies won't venture. And that can mean no affordable broadband Internet.

17. Judging Deregulation  Checkpoint: How does deregulation encourage competition in a market?  Usually many new firms entered deregulated industries right away.  Deregulation often weeds out weaker players in the long term but it can be hard on workers in the short term.

18. Deregulating the Airlines  When airlines were first deregulated, many new airlines entered the market, but some eventually failed.  Competition increased among the remaining airlines and prices went down. Yet many busy airports had and still have one dominant airline.

19. Deregulating the Airlines, cont.  The 9/11 attacks caused many people to stop flying and revenues fell as costs for security, insurance, and fuel rose.  Today the future of the airline industry is still uncertain.

20. What is Government’s role in financial markets?  Government protects consumers in financial markets through regulations and enforcement by agencies such as the:  Truth in Lending Act  Federal Deposit Insurance Corporation  Securities and Exchange Commission  Federal Reserve System 20

21.  Truth in Lending Act is designed to make sure you have all of the information you need to make a healthy decision about borrowing money. Truth in Lending Act 21

22. What is the FDIC?  The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your deposits if an FDIC- insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC's creation in 1933, no depositor has ever lost even one penny of FDIC-insured deposits. 22

23. Select the image above to watch the FDIC Video Clip! 23

24. What is the FDIC?  FDIC insurance covers all deposit accounts at insured banks and savings associations, including checking, NOW (Negotiable Order of Withdrawal) accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to the insurance limit.  The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank or savings association.  The Federal Deposit Insurance Corporation (FDIC) offers insurance on bank accounts up to $250,000 to make sure customers do not lose too much money if their bank fails. 24

25.  Government protects consumers in financial markets through regulation and enforcement by the SEC which monitors companies to make sure they disclose meaningful financial and other information so you have access to the information you need to make healthy investment decisions. Securities and Exchange Commission 25

26.  Select each image and view the video link about the SEC for more information to help you understand its’ role. 26

27.  What is a bank run?  Why does the Federal Reserve System protect us from Bank Runs? The Federal Reserve System Select the image at right to demonstrate how a bank run occurs. 27

28. The Federal Reserve System Select image to view “In Plain English” Video Clip 28 http://www.thefreedict ionary.com/Federal+ Reserve+System

29. Terms You Need To Know….  Definition of 'Inflation'  The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.  As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. Most countries' central banks will try to sustain an inflation rate of 2-3%. 29

30. Monetary Policy Definition of 'Monetary Policy' The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).  In the United States, the Federal Reserve is in charge of monetary policy. Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%. 30

31. Fiscal Policy  Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883–1946), who believed governments could change economic performance by adjusting tax rates and government spending.  To illustrate how the government could try to use fiscal policy to affect the economy, consider an economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest. Increased consumer spending or investment could improve economic growth. Regulators don’t want to see too great of a spending increase though, as this could increase inflation. 31

32. Fiscal Policy cont…  Another possibility is that the government might decide to increase its own spending – say, by building more highways. The idea is that the additional government spending creates jobs and lowers the unemployment rate. Some economists, however, dispute the notion that governments can create jobs, because government obtains all of its money from taxation – in other words, from the productive activities of the private sector.  One of the many problems with fiscal policy is that it tends to affect particular groups disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some groups might see larger decreases than others. Likewise, an increase in government spending will have the biggest influence on the group that is receiving that spending, which in the case of highway spending would be construction workers. 32

33. Discretionary Spending  Discretionary spending is a spending category through which governments can spend through an appropriations bill. [1] This spending is optional as part of fiscal policy, in contrast to entitlement programs for which funding is mandatory. [2]spendappropriations bill [1]fiscal policyentitlement programs [2]  In the United States, discretionary spending refers to spending set on a yearly basis by decision of Congress. Such spending is usually authorized by Congress in another act. Provisions of an appropriations act that authorize spending are earmarks. When an authorization act also appropriates funds, it is called mandatory spending.earmarksmandatory spending 33

34. What are market failures? 1.Government regulations also aim to remedy market failures. A market failure occurs when the market forces of supply and demand do not lead to the output society desires. 2. Four primary sources of market failure Public goods, such as military protection and roads, are provided by government since the market would fail to provide them. 3. Market power occurs when a shortage of completion results in rising prices. 4. Government may pass laws such as the Sherman Antitrust Act and regulate through agencies like the Federal Trade Commission. 5. It may regulate “natural monopolies,” such as electrical utilities. www.youtube.com/watch?v=rJixtB0GluQ

35. What is government failure?  A government failure occurs when the cost of solving a market failure is greater than the benefit. www.youtube.com/watch?v=PcZiCkHOVJQ

36. What are some of the goods and services provided by government?  The government provides goods and services such as military protection, street lights and police protection.  These goods and services may not provided by the private sector because it would not be profitable for them to do so when non payers might enjoy the benefits.

37. Why are these goods and services not provided by the private market?  Though schools, roads and fire protection can be provided by the private sector, the government generally provides them as these services benefit society as a whole.  An educated public benefits the whole society.  Roads facilitates trade.  If one person’s house burns and the fire department refuses to come due to nonpayment, neighboring houses may also catch fire. www.youtube.com/watch?v=3o5NxNnaxN8

38. The Government’s Role and the Poverty Problem  In a free market, the wealth is spread unevenly throughout society, which leaves some people below the poverty threshold.  The U.S. Bureau of the Census sets the poverty threshold based on the cost of the goods a family needs to buy.  The government provides a safety net to groups like the very young, the very old, the sick, the poor, and the disabled through various federal, state, and local government programs.

39. The Government’s Role, cont.  One government program, the welfare program, collects funds from taxpayers and redistributes this money to those in need.  The government provides health care to the elderly (Medicare), the disabled, the poor (Medicaid), and children who are uninsured (SCHIP).  The government also funds educational programs from preschool to college.

40. Four Primary sources of market failure continued…  Externalities exist when some of the costs and the benefits associated with production and consumption of a product fall on someone other than the producers or the consumers of the product (e.g., air and water pollution, noisy neighbors). The market cannot solve this; sometimes the government does – EPA.  Inequity exists because markets reward people according to their effort and skills. People without skills, or who cannot work, are likely to be poor. Governments often redistribute income in order to alleviate poverty.

41. Market Failures  Public goods are examples of a market failure, where the free market does not distribute resources efficiently.  For example, the free market would not be able to build roads efficiently because building roads does not meet the criteria for a properly functioning market system. Thus, road construction is a market failure.

42. Externalities  Understanding externalities helps us see more roles that the government plays in the U.S. economy.  The government may take action to create positive externalities, such as improving education.  The government aims to limit negative externalities like pollution.

43. Externalities  Many economists feel that the private sector produces more positive externalities that the government does.  This belief shows itself in the debate over how to stop pollution to the environment.

44. Positive Externalities  Public goods involve externalities, which may be either positive or negative.  Positive Externalities  Represent the beneficial side effects of public goods.  Can also be generated by the private sector.  Allow someone who did not purchase a good to enjoy part of the benefits of that good.

45. Negative Externalities  Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer. Why would increased car traffic be considered a positive externality by some people and a negative externality by others?