Chapter 23- Government and the Economy

Providing Public Goods Private goods are goods that when consumed by one individual, cannot be consumed by another (Ex. Clothes, food, haircuts, etc.) These goods are subject to the exclusion principle which means a person is excluded from using the good or service unless they pay for it

Providing Public Goods Public goods are goods that can be consumed by one person without preventing consumption of the good by another (Ex. Libraries and parks) These goods are subject to the nonexclusion principle which means no one is excluded from consuming the benefits of the good whether or not they pay

Providing Public Goods An externality is the unintended side effect of an action that affects someone not involved in the action; they can be positive (bonuses) or negative (pollution)

Maintaining Competition A monopoly is a sole provider of a good or service, there is no competition and they can charge whatever price they want and consumers could suffer The government tries to encourage competition through antitrust laws to control monopolies and preserve and promote competition Standard Oil was seen as a monopoly; it controlled 90% of oil refining companies in the US in 1890

Maintaining Competition In 1890, the federal government passed the Sherman Antitrust Act which banned monopolies and other forms of businesses that prevented competition

Maintaining Competition A merger is a combination of two or more companies to form a single business, these can sometimes threaten competition

Maintaining Competition A natural monopoly occurs when the costs of production are minimized by having a single firm produce the product, in exchange for this the firm agrees to government regulation (Ex. Gas, electricity, water services)

Maintaining Competition The Food and Drug Administration deals with labeling of food, drugs, and cosmetics; the Federal Trade Commission deals with false advertisements and product claims

Maintaining Competition Product safety is an important area of regulation, if a product poses a safety hazard the government issues a recall where the product is pulled off the market

Measuring Growth Real GDP shows an economy ’ s production after distortions of price increase have been removed, this eliminates the impression that output goes up when prices do

Measuring Growth The economy goes through alternating intervals of growth and decline that we call the business cycle (line moves up, GDP grows, moves down it declines) An economic peak is the highest point of economic prosperity; a trough is the lowest point in the business cycle

Business Fluctuations An economic expansion takes place when real GDP goes up; it reaches its highest point and then begins to decline A recession takes place when real GDP goes down for six straight months

Business Fluctuations If a recession becomes severe, it may turn into a depression Unemployment during the Depression

Business Fluctuations The unemployment rate is the percentage of people in the civilian labor force who are not working but are looking for jobs; this is a measure of the economy

Business Fluctuations Fiscal policy is changes in government spending or tax policies; the government does this to help the economy (Ex. Cutting taxes or increasing spending)

Business Fluctuations Another important indicator of an economy ’ s performance is inflation, a sustained increase in the general level of prices, it reduces people ’ s purchasing power

Business Fluctuations A way to measure inflation is by studying the Consumer Price Index which is a measure of the price level of 400 products commonly used by consumers

Stocks and Stock Markets Investors buy stock to make money; profits come in two ways- from dividends or from capital gains A dividend is a share of the corporation ’ s profits that are distributed to shareholders; a capital gain occurs when stock can be sold for more than it cost to buy

Stocks and Stock Markets The price of a stock is determined by supply and demand; investors consult stock indexes to measure stock performance (Ex. Dow-Jones and S&P 500) Stocks are bought and sold in a stock market, or stock exchange, you can call a stockbroker who can buy or sell your stocks

Stocks and Stock Markets Most stocks in the US are traded on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ

Income Inequality Three influences on income: level of education, family wealth, and discrimination

Poverty The goal of the food stamp program is to alleviate hunger and malnutrition by allowing low-income households to obtain a more healthful diet

Poverty Another program is the Women Infant and Children program which provides help with nutrition and healthcare to low- income women, infants, and children

Poverty Supplemental Security Income gives payments to blind or disabled people and to persons 65 and older; Temporary Assistance to Needy Families makes payments to families who need help because a parent is dead, disabled, or absent

Poverty Workfare describes programs that require welfare recipients to exchange some of their labor in exchange for benefits; it teaches people job skills

Poverty Another way the government helps the poor is with a progressive income tax the tax rate is lower at lower incomes and higher at higher incomes

Poverty The Earned Income Tax Credit gives tax credits and cash payments to qualified workers