& Government The American Economy
A "Mixed" Economy
What?
Private sector Public sector (goods & services) Public regulation of private sector
2
Why?
Market failure Reaction to abuses Policy choice
3
Market Failure: Public (Collective) Goods
Consumption is not
Rival Exhaustive Thus, market will not provide them(at least to the extent or in the proper manner) Nor will noncoercive collective provision work (because of "free riders") So, to have them, government must provide
4
E.g.s
Defense Public safety
5
Market Failure: Externalities
Private businesses exist to earn profits They also produce other effects (positive & negative) as a natural part of their business activities But they are (should) not be concerned with these other effects
6
Market Failure: Externalities, cont.
E.g.s
Government should
Pollution Job creation
Protect public from Encourage provision of
7
Market Failure: Monopoly, Oligopoly
Market theory is based on many assumptions A key one is that there are many competing suppliers bringing goods to the market Where this is not the case, the market not will function efficiently Or at all
8
Government Acts To
Protect the market (antimonopoly laws) Provide for a quasimarket atmosphere (regulation of "natural" monopolies)
9
Reaction To Abuses
Upton Sinclair, The Jungle Pharmaceuticals & the FDA Value Jet & the FAA
10
Policy Choice
Some public goods could be privately provided, but government chooses to provide them instead
Utilities Education
o Externalities o Nationbuilding
11
Because
Insufficient private supply Potential abuses Political stability
12
Government's Economic Functions
Allocation: providing public goods & services Distribution: adjusting the distribution of income & wealth Stabilization: using fiscal & budget policies to maintain GNP, low unemployment, etc.
13
Types of Public Spending
Exhaustive Transfers
14
Exhaustive Spending
Withdraws money from the private sector Spends it in the public sector
Wages & salaries Infrastructure
15
Transfers
Withdraw money from one part of the private sector Return it directly to another part of the private sector
Welfare (Business subsidies)
16