THE MARKET SYSTEM

Public Sector and Government Functions AP ECONOMICS CHAPTER 4 McConnell Brue

MARKET SYSTEM CHARACTERISTICS  PUBLIC SECTOR – includes all levels of government (national, state & local)  Performs functions not possible by private sector  Provide public goods and services  Receive tax revenue to pay for government spending (or borrow!)

Economic Functions of Government

1. LEGAL & SOCIAL FRAMEWORK –  Laws promote order which inspires confidence in the market system    Ensures property rights (deeds, titles, etc) Protects ownership through “ rule of law ” Courts exist to mediate disputes and provide fair and efficient solutions

Economic Functions of Government

2. PROVIDE PUBLIC GOODS AND     SERVICES Would not be provided by the private sector due to “ free rider ” problem & low incentives Can be offered to many at low additional cost Difficult to “ exclude ” others from using Examples: military, ,police, fire protection, streets & highways, public schools, libraries, parks, monetary system, etc.

Economic Functions of Government

3. MAINTAIN COMPETITION – rules for fair competition to protect businesses & consumers  Monopolies are illegal (Sherman Antitrust Act)  “ Natural or Legal ” regulated Monopolies are allowed, but  Examples of legal monopoly: cable service, utility price regulation, mass transit, AMTRAK

Economic Functions of Government

4. REDISTRIBUTION OF INCOME – Market system allows unequal distribution of income. Society chooses to collectively provide help for some social problems.

 Progressive taxes - larger proportion of wealth of the rich is taxed  Transfer payments – provide for the poor, disabled, unemployed, elderly, etc.  Examples: Social Security, Medicare, Medicaid, Food Stamps, other welfare programs

Economic Functions of Government

4. REDISTRIBUTION OF INCOME (con ’ t)  Market Interventions – government regulates prices for fairness  Examples: farm subsidies - payments to farmers so low price will not hurt them Minimum wage laws – require employers to pay a fair wage so less skilled workers can support themselves

Economic Functions of Government

5.CORRECTING FOR MARKET FAILURES (Externalities; Spillover Costs & Benefits) – when mkt produces wrong amount of a good or service or fails to produce at all  Cost or benefits goes to neutral 3 rd party  Producer does not pay full costs of production Example: secondhand smoke, pollution, drunk drivers, property improvements in neighborhood, good schools improve community, immunizations

Economic Functions of Government

 CORRECTING FOR MARKET FAILURES Negative Externality can be corrected by:  Laws & regulations – costs must be paid upfront or actions are outlawed; fines, etc.

 Taxes – cover the cost of government cleanup or later treatment, solutions etc. Positive Externality can be encouraged by: Subsidies to producers to increase supply Tax incentives (tax breaks, etc) Government provides goods or services

Economic Functions of Government

6. STABILIZING THE ECONOMY – to correct economic problems (mainly recession/unemployment or inflation)  Output depends on spending to encourage production  Too little spending = recession & unemployment  Too much spending = inflation & instability

Economic Functions of Government

 STABILIZING THE ECONOMY (con ’ t)  Gov can correct through taxing and spending  Too little spending – can reduce taxes &/or increase gov spending  Too much spending - can increase taxes &/or decrease gov spending

Circular Flow Chart

RESOURCES RESOURCE MARKET WRIP COST OF PRODUCTION BUSINESSES CONSUMER SPENDING REVENUE L,L,C,E,T HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

Circular Flow Chart

RESOURCES RESOURCE MARKET L,L,C,E,T GOVERNMENT BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET