Roles of Government in a mixed economy Government

Roles of Government in a mixed economy

Government in the Circular Flow Model ¡ ¡ Supplies goods and services to business firms and households Demands resources in resource markets Taxes household income and business revenues Transfers income to households

7 Roles of Government in a mixed economy 1. Establishing and enforcing rules of exchange a. Property rights b. Contract law

7 Roles of Government in a mixed economy 2. Promoting competition/prevent anticompetitive practices

7 Roles of Government in a mixed economy 3. v Regulating natural monopolies One firm that can serve the entire market at a lower per- unit cost than can two or more firms

7 Roles of Government in a mixed economy 4. Provide public goods Technical characteristics of public goods: l l Non rival consumption High cost of excluding those who do not pay

Public v. private goods Cost of exclusion→ high Pure public Private 0 high Degree of rivalness→

7 Roles of Government in a mixed economy 5. Dealing with externalities Externality is a cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction a. b. Negative externality – cost imposed on others Positive externality – benefit gained by others Visibility Impairment from Air Pollution Shenandoah National Park - Virginia

7 Roles of Government in a mixed economy 6. Redistribute income President F. D. Roosevelt Signing the Social Security Act of 1935

7 Roles of Government in a mixed economy 7. Promote macroeconomic goals of: a. b. c. Full employment Price stability Economic growth Monetary policy pursued by the Federal Reserve Fiscal policy pursued by the Federal government