Public Sector and Gov. Functions
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Transcript Public Sector and Gov. Functions
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” Monopolies are allowed, but
regulated
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
or benefits goes to neutral 3rd party
Producer does not pay full costs of production
Example: secondhand smoke, pollution, drunk
drivers, property improvements in neighborhood,
good schools improve community,
immunizations
Cost
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
COST OF
PRODUCTION
L,L,C,E,T
WRIP
BUSINESSES
HOUSEHOLDS
CONSUMER
SPENDING
REVENUE
GOODS &
SERVICES
PRODUCT
MARKET
GOODS &
SERVICES
Circular Flow Chart
RESOURCES
BUSINESSES
GOODS &
SERVICES
RESOURCE
MARKET
GOVERNMENT
PRODUCT
MARKET
L,L,C,E,T
HOUSEHOLDS
GOODS &
SERVICES