1. Government and the United states economy
Chapter 12

2. Government’s role in the economy
Four important referee roles of government in the economy:
To enforce private property rights
To monitor external costs and benefits
To ensure market competition
To protect consumers
Enforce private property rights:
Necessary rules and regulations
Neutral party needs to intervene and insure that the market system function properly and fairly
Monitor externalities:
Externality: an economic side effect of producing or consuming a good or service that generates benefits or costs to someone other than the person who decides how much to produce or consume
External: fall beyond the control of the producer or consumer
EPA: Environmental Protection Agency: deals with external costs by setting and enforcing standards for clean air and water

3. Government’s Role cont…
Ensure market competition:
Predatory pricing: selling a product below its cost with the goal to drive competitors out of business
Existing businesses agree to temporarily drop their prices to force out of the market a competitor who can’t match their price
To ensure market competition in the U.S. CONGRESS has enacted antitrust laws.
Trust: an illegal combination of companies into one company
4 key laws that form the basis of antitrust legislation

4. 4 key laws of antitrust legislation:
The Sherman Antitrust Act of 1890:
Made it illegal to create a monopoly, enter into a conspiracy to create a monopoly, or restrain trade
Include agreements to fix prices, rig bids, and divide markets
The Clayton Act of 1914:
Prohibits certain business practices, such as giving special rates to certain customers if the practice lessens competition or tends to create a monopoly
The Federal Trade Commission Act of 1914:
Created the Federal Trade Commission (FTC) to enforce antitrust laws
In 1938, the FTC was given the added responsibility of protecting the public against false or misleading advertising
The Celler-Kefauver Act of 1950: amended the Clayton Act by broadening it to include any merger that lessens competition or tends to create a monopoly

5. Government’s role cont…
Protect consumers:
Food and Drug Administration
National Transportation Safety Board
Both are responsible for enforcing laws that protect the general public from faulty products or deceptive advertising
Require that businesses comply with certain standards and rules when producing a good or service
Ensure a level of safety and quality for consumers
Prevent businesses from cutting corners to reduce costs

6. Government as a manager:
Stabilize the economy
Promote economic security
Provide public goods and services
STABILIZE the ECONOMY:
Fiscal policy: uses government spending and taxation to stabilize the economy
Monetary policy: involves regulating the money supply to help the economy achieve a full- employment, non-inflationary level of total output

7. Government as a manager:
Promote Economic Security:
Social Security and Medicare taxes and wages
Programs to help poor, disables, and retired people fall into two categories:
Increase income and the standard of living include Social Security and other retirement programs, welfare payments, Medicare and Medicaid, food stamps, and unemployment insurance
Eliminate the causes of poverty and economic disadvantage include enforcement of anti- discrimination laws and provide for educational opportunities to help people develop skills and increase their labor productivity

8. Government as a manager:
Provide public goods and services:
Government is considered the PUBLIC sector of our economy, considered a service provider
Public sector: part of the economy that involves the transactions of government
Government’s emphasis on management:
Veterans’ hospitals
National security
Business regulation
Public good: once provided, it is available to anyone without additional cost

9. Federal government spending and taxation
Fiscal year: a twelve-month period that can begin on any date
Begins on Oct. 1 and ends on Sept. 30 the next year
Federal government spending:
Transfer payments: a transfer of money by a level of government to a household or business firm for which the payer (government) receives no good or service directly in return
Federal government taxation:
Income taxes
Individual income taxes
Social insurance and retirement
FICA: Federal Insurance Contribution Act:
Represents the taxes people pay for Social Security and Medicare

10. Tax Policy
“in this world nothing can be said to be certain, except death and taxes.”
Principle purpose of taxes is to pay the cost of government
Taxes can discourage activities the government believes to be harmful
Example: cigarettes/liquor “sin taxes” have been levied to raise money and discourage people from smoking and drinking
Taxes as incentives: allows the firm that purchases new equipment to pay lower taxes as a result of the purchase
Federal government can use tax policy to alter the level of economic activity.
By increasing or decreasing taxes, government can affect overall spending and production = thereby, stabilizing the economy (fiscal policy)

11. Principles of taxation
Benefits-received principle:
States that government should tax people in proportion to the benefits they receive from a good or service
Principle: those who benefit from good or services should pay for its use
Ability-to-pay principle:
States that the government should tax people in proportion to their ability to pay the tax

12. Types of taxes: Proportional Tax: (flat tax) Progressive tax:
Tax for which the percentage of income paid in taxes is the same for all income levels
Flat tax: as a person’s income goes up, the person’s income tax goes up by the same proportion
Example: $100, 000/year vs. $25,000/year
Proportional rate of 20%
$25,000 would pay $5,000 in taxes
$100,000 would pay $20,000
Progressive tax:
Takes a higher proportion of income from higher income earner than from lower income earners
Example: $25,000/year tax rate of 20%, someone earning $100,000/year tax rate of 40%
As someone’s income goes up, the income tax goes up by a greater proportion
Federal income tax is considered a progressive tax
Regressive tax:
Tax for which the percentage of income paid in taxes decreases as income increases
Takes a higher percentage of income paid in taxes decreases as income increases
Takes a higher percentage of taxes from low-income persons than from high-income persons

13. Characteristics of a good tax
Efficient to collect
Government must provide a good reason for imposing a tax
Taxpayers must know what purpose their taxes will serve
Must treat taxpayers fairly
Must be certain
Taxpayers must know when a tax is due, exactly how much it will be, and how to pay it correctly
Paying a tax must be simple and convenient for the taxpayer

14. Debt and deficits
Budget expenses exceed income, the difference is a deficit
Income is greater that expenses, the difference is surplus
National debt: cumulative sum of all federal government borrowing used to finance annual deficits
Gross debt: the total of all the federal government’s IOU’s
Publicly-held debt: the gross debt minus the amount government agencies have invested in government securities

15. Justification for Federal deficits and the national debt
The national debt is not as large as it seems
When our economy is sluggish or declining, the budget deficit might increase total spending in the nation
This can occur if the government borrows and spends dollars that people have saved but which businesses are not investing

16. Criticisms of federal deficits and the national debt
Annual interest payments on the national debt have been a large growing portion of the federal budget
Unless budget deficits fall, interest payments will continue to rise in the future
Large deficits might lead to higher interest rates
To cover its deficits, the government can borrow money from the same places that businesses borrow: banks, corporations, and foreign lenders
Cost of loans is in the form of interest is a price just like other prices
If government borrowing adds significantly to the demand for available funds, interest rates might increase
Deficits may reduce private investment
Less investment in plants and equipment means that fewer new jobs will be created
Deficits may trigger inflation
A government may simply print money to finance its deficits or repay its debts
This would increase the amount of money faster than the supplies of goods and services which people spend money on. Inflation would result.