Government as Economic Actor

Objectives:

1. Identify the six economic functions of government.

2. Classify examples of government actions and policies within various economic functions.

Introduction

There is an economic role for government in a market economy whenever the benefits of a
government policy outweigh its costs .

(EXAMPLE: Government often provides for national defense, address environmental

concerns, define and protect property rights, and attempt to make markets more competitive.
Most government policies also redistribute income.

To Understand More:

In order to ensure and support economic freedom as well as political freedom, the founders of
the United States envisioned a limited role for the Government in economic affairs.

(EXAMPLE: In a market economy such as the one established by the U.S. Constitution,
most economic decisions are made by individual buyers and sellers, not by the Government.

Six Economic Functions of the Government

1. Maintain the Legal and Social Framework

- Define and Enforce Property Rights
o (EXAMPLE: create laws and provide courts, provide information and
services to help economy function better, establish a monetary system,
define and enforce property rights.)
o (SITUATIONAL EXAMPLE: Government passes laws and
establishes a court system. No one could sell property, invest, or have
confidence in contracts if this legal system did not exist.)
- Establish a Monetary System
o (SITUATIONAL EXAMPLE: The Government controls the amount
of money circulating in the economy; it also regulates banks and other
financial institutions. People would have to barter for the goods and
services they wanted if this monetary system did not exist, and they
might stay away from banks if banks were not regulated.
2. Maintain Competition
- Create and enforce antitrust laws, and regulate natural monopolies.
 o (EXAMPLE: Create and enforce antitrust laws, regulate natural
monopolies.
o (SITUATIONAL EXAMPLE: The government regulates the prices
charged by companies that distribute natural gas to homes. Companies
might charge higher prices and provide poor products if government
policies did not promote competition.
3. Provide Public Goods and Services
- Public goods and services are those that markets will not provide in sufficient
quantities.
o (EXAMPLE: Provide goods and services that markets are unable or
unwilling to provide such as national defense, road ways, post offices
and mail carriers, public defenders, public health, clinics, public
schools, and other important goods and services.
o (SITUATIONAL EXAMPLE: Some important goods and services
would be unavailable if the government did not provide them.
4. Correct for Externalities
- Reduce negative externalities-- negative externalities exist when some of the
costs associated with production or consumption “spillover” to third parties
(people other than the producer or consumer of the product).
o (EXAMPLE: Pollution of lakes and rivers caused, for example, by
industrial waste.
o (SITUATIONAL EXAMPLE: The pollution affects everybody who
uses the lakes and rivers, including those who had no part in producing
or purchasing the products causing the pollution. Government
regulates pollution. The environment would be far more polluted
without government action.
- Encourage increased production of goods and services that have positive
externalities-- positive externalities exist when some of the benefits associated
with production or consumption “spill over” to third parties— people other
than the producer or consumer of the product.
o (EXAMPLE: Public Education.
o (SITUATIONALA EXAMPLE: Government subsidizes education
because its benefits flow to the students and to society in general. We
would have fewer benefits linked to education without subsidization.
5. Stabilize the Economy
- Reduce unemployment and inflation, and promote economic growth.
o (EXAMPLE: Example: Use government budgets and/or the money
supply to promote economic growth, control inflation, and reduce
unemployment.
 o (SITUATIONAL EXAMPLE: The federal government attempts to
stabilize the economy through applications of fiscal policy by raising
or lowering taxes, or by government spending and monetary policy,by
controlling the money supply or by changing interest rates.Without
these actions, the economy might take much longer than it ordinarily
does to recover from recessions.
6. Redistribute Income
- Redistribute income from people who have higher incomes to those with
lower incomes.
o (EXAMPLE: Higher income tax rates for rich than for poor, provide
social security, and aid to dependent children, Medicare, Medicaid.
o (SITUATIONAL EXAMPLE: Redistribution usually involves higher
tax rates for people with higher incomes. The tax revenue raised in this
way helps to pay for various welfare programs, the Medicaid program,
legal defense clinics, etc. Some people could not afford basic
necessities without government redistribution programs.

Key Points/ Conclusion:

All levels of government work to maintain the legal and social framework, and provide
public goods and services; that state and national governments have the major responsibility for
maintaining a competitive framework, redistributing income, and dealing with externalities; and
that the national government has the responsibility for stabilizing the economy.