GOV’T ROLES IN

MARKET ECONOMY
Alabama COS Standard 4
 Describe the role of government in a market
economy, including promoting and securing
competition, protecting private property rights,
promoting equity, providing public goods and
services, resolving externalities and other market
failures, and stabilizing growth in the economy.
Market Economy
 Adam smith (1723-1790)
 Scottish economist and philosopher
 “an inquiry into the nature and causes of the wealth of nations”
 Said when gov’t is not involved, market is driven by self interest
Market Economy
 Self interest
 The impulse that encourages people to fulfill their
needs and wants
 Smith argued that this self-interest helped the economy
to grow
 Said self-interest acts as “invisible hand” that leads
them to do what is best for society
 Smith believed gov’t involvement limits ability of the
“invisible hand
Market Economy
 Incentives
 Something that encourages you to behave in a particular

way
 Can be a positive incentive or negative incentive
Market Economy Gov’t Roles
 Protection of Property Rights
 Redistribution of Income
 Production of Public Goods
 Resolving Market Failures
 Promoting and Securing Competition
Protection of Property Rights
 Makes laws to protect private property
 Patents
 Helps guarantee protection of new ideas and
innovations
 Helps inspire innovation and new ideas
 Helps Economy be more productive
Redistribution of Income
 To help insure equity in the market
 Through taxes
 Used in areas that benefit society as a whole
 Schools, roads, bridges, parks, etc…
 At the federal level, usually done via the
progressive income tax
Production of Public Goods
 Things the market could not produce enough of on
its own
 National defense, police and fire protection
 Example: Fire Protection
Resolve Market Failure
 Can occur if market produces too much/too little
 Government can use incentives to either encourage
or discourage production or consumption
 Example:
 Site advantage- Governments may provide potential
businesses with free land, buildings, exemptions from
local and state regulations, and other customized
services for agreement to develop a specific area.
Promoting and Securing Competition

 Competition is what helps market economy thrive

 Anti-monopoly laws
 Designed to help promote competition
 Sherman Act of 1890
  was the first Federal act that outlawed monopolistic business
practices. The Sherman Antitrust Act of 1890 was the first
measure passed by the U.S. Congress to prohibit trusts.
Positive and Negative Externalities
 Externality
 Effect an economic activity has on those not directly
involved in that activity
Positive Externality
 Mostly positive effects of an economic activity
 Example: increased spending on public education
 Better educated citizens could lead to new innovations
and more productive society
Negative Externality
 Negative effects of an economic activity
 Example: closing of an automobile plant
 Obviously people lose jobs and income
 Less tax money=fewer services
 Less business for other unrelated businesses
 Movie theater
 Grocery store
 Fast food restaurant
Regulatory Agencies
 Departments of federal gov’t responsible for some
specific areas of concern
 In U.S., part of the Executive Branch
Environmental Protection Agency
 Enforces laws of Congress
 Concerned with the environment and safety of
citizens
 Created in 1970 by President Nixon
Food and Drug Administration
 Part of the Department of Health and Human
Services
 Supervises the production of foods and medicine
 Was created in 1906
Federal Trade Commission
 Looks for anti-competitive business practices
 Monopolies, false advertising, fraud