Government & the Economy Chapter 11

Essential Question(s) Private Property Rights and Government Regulations Essential Question(s) 2. Who or what does the government protect through government regulation? 1. How do property rights, & the protection of those rights, affect economic activity?

Good government makes a market economy possible. Period Good government makes a market economy possible. Period. And bad government, or no government, dashes capitalism against the rocks, which is one reason that billions of people live in dire poverty around the globe. Charles Wheelan “Good government makes a market economy possible. Period. And bad government, or no government, dashes capitalism against the rocks, which is one reason that billions of people live in dire poverty around the globe.” American Economist Quote from Naked Economıcs: Undressıng the Dısmal Scıence 2002

1. Property Rights provide incentives to invest/and or produce goods The Main Ideas 2. The government seeks to protect consumers, workers, and the environment through government regulation

Economic Powers of the Government Government’s Role in the Economy Economic Powers of the Government Article I of the Constitution gives government the power to intervene in the economy. What do you think some of those powers are? These constitutional powers allow the government to regulate the economy. Thus, anything the government does in relation to the economy is based in the Constitution

Government Protection of Property Rights Property Rights: allow people to use their possessions as they choose Private Property: Land, physical possessions, intellectual property As a property owner your rights are: Exclusive use of your own private property Legal protection for your property To sell or trade your property

Government Protection Property Rights Think-Pair-Share: Why does the government bother to protect these rights? By protecting property rights, the government helps the economy progress How does the government protects property rights? The court system 2. Patents, trademarks, and copyrights issued by the U.S. Patent and Trademark Office Protect intellectual property https://www.uspto.gov/

Government Protection of Property Rights Ownership of property creates incentives which then promote economic progress. Taking care of your property Use property efficiently/productively Develop property that would be useful to others

An Exception to Property Rights: Eminent Domain: What is Eminent Domain? The power of the government to take property from a private owner for a public purpose. Gov’t must compensate for the loss of property Power is granted from the Taking Clause of the Fifth Amendment Public Purposes: Building schools, Rec Centers, Fire Departments, public roads all things that benefit the public, or that the public would use

Complete the Anticipation Guide before you start reading. 2. The Story Behind Kelo v. New London 3. After you finish the Anticipation Guide, answer the following questions as you read the article. 4. After you finish reading, go back and fill out the Reflection portion of the Anticipation Guide.

The Story Behind Kelo v. New London

Government Regulation of the Economy Through regulation the government tries to protect all participants in the economy It does this by: Maintaining competition Protecting the consumers, the savers, and the investors Protecting workers

Government Regulation by Maintaining Competition The government maintains competition by preventing: price fixing bid rigging market division monopolies and trusts The Justice Department and the Federal Trade Commission investigate and enforce laws protecting economic participants from the things listed above.

Government Role by Maintaining Competition Competition is essential to a market economy because it forces producers to use resources efficiently, it encourages innovation, and it keeps products and services affordable. When markets fail to be competitive the government steps in to ensure or encourage competition

Government Role by Protecting Consumers, Savers, and Investors The government protects consumers, savers and investors in order to ensure that they: possess all necessary information to make wise and safe purchases are protected against dishonest businesses and individuals can feel confident about their economic choices

Government Role by Protecting Consumers, Savers, and Investors Consumers are protected by the Food and Drug Administration (FDA) and the Consumer Product Safety Commission. Upton Sinclair and the meat packing industry lead to the passing of the Meat Inspection Act and the Pure Food and Drug Act 1906 lead to formation of the FDA Savers and Investors are protected by the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC). FDIC insures bank deposits up to 100,000 per depositor SEC makes sure that investors make wise investment decisions

Government Role in Protecting Workers The government protects workers to ensure that they: Get paid Work in a discrimination free environment Have unemployed insurance Are safe from unsafe and/or unhealthy practices in the workplace Workers are protected by the Department of Labor and the Occupational Safety and Health Administration (OSHA).

The Downsides of Government Regulation These are the problems associated with government regulation in the economy: Overregulation Balancing Costs and Benefits Regulatory Capture

The Downsides to Government Regulation Overregulation: Complying with (following) government regulations can be expensive. Balancing Costs and Benefits: Having to decide at what point is regulation uneccessary or when it needs to end. Regulatory Capture: When regulatory agencies are dominated by the industry they regulate. Often referred to as “captured agencies” Act in the best interests of the industry rather than public interest

Deregulation Deregulation: The process of removing government restrictions on the economic activity of different industries. Industries that have been deregulated: Banking, airlines, cable television, electric power, and interstate trucking industries Deregulation can sometimes cause negative affects as well

Deregulation

Limiting Negative Externalities The government limits negative externalities through command and control policies, as well as market-based policies Command and Control Policies: Issuing rules/procedures/orders that are expected to be followed EPA has command and control policies to reduce air pollution Market-Based Policies: Use of incentives rather than rules and enforcement to change producers’ behavior Corrective tax: government taxes polluters get added benefit of additional revenue

Cap and Trade Cap and Trade Policy: a market-based policy used to limit negative externalities This policy works by: Setting a cap on the amount of pollution that companies can emit Gov’t then issues a limited number of permits to every firm who emits certain types of pollution 1990’s EPA uses cap and trade policy to reduce acid rain

Tragedy of the Commons Common Resources: a resource that everyone has access to and can be easily overused or destroyed (atmosphere, oceans) “Tragedy of the Commons” refers to problem of overused or destroyed common resources. This problem arises when property rights are not well defined Think-Pair-Share: How do ill-defined property rights lead to the abuse of common resources? When property rights are ill-defined, people lack the incentive to care for common resources to ensure that those resources are preserved for future use, thus abusing those resources

Preserving Common Resources The government tries to preserve common resources by: Tolls or Fees: toll roads to reduce overcrowding and maintain the highway Quotas: maximum amount of a resource people can use. Used to resolve over-fishing Privatizing Resources: turning a common resource into a private resource to increase incentive to take care of it. Must be granted by the gov’t.

Promoting Positive Externalities The government can promote positive externalities by implementing policies, providing subsidies, or providing services outright. Example of a subsidies: grants or loans to students pursuing higher education or to the universities Examples of services outright: public universities, U.S. Postal Office, National Security, air traffic control

Providing Public Goods Think back to the principle of Scarcity forces Trade-offs. Because the government cannot provide EVERYTHING the public needs, it must weigh the costs and benefits of providing certain public goods. What are some examples of public goods that government must decide to provide? Government failures: Logrolling (tit for tat amongst legislators) pleasing voters special interests “Employment Security” for agencies Government failures lead to waste or excessive spending

Promoting General Welfare The government promotes the general welfare by: Stabilizing the economy Alleviating poverty Income redistribution Taxes Welfare/Public Assistance Programs Subsidies

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