Economics: Government and the economy

1. Economics: Government and the economy Mr. Irwin---Heritage High School

2. Important Vocabulary • Regulation • Eminent Domain • Regulatory Agency • Merger • Deregulation • Common Resource • Government Failure • Poverty Rate

3. Government Involvement • Government plays a role in economy • Should it? • Is it allowed to intervene? • Yes—Article I of the Constitution • Allows Congress to perform a variety of tasks • Lay and collect taxes • Borrow money • Regulate interstate and foreign commerce • Coin money and regulate its value

4. Regulation • Government establishes laws and rules designed to influence economic behavior in desirable ways • Known as “regulation” • What do you think? Is this right? • Turn to a partner and share

5. Protecting Property Rights • Comes from Constitution • Essential for free enterprise system • Why? Incentives matter • Ownership: • Encourages people to care about property • Encourages productive use of property • Encourage development of property in ways that benefit others • Exception: Eminent Domain • Power to force transfer of property to gov.

6. What Regulatory Roles? • Maintaining Competition • Justice Department • Federal Trade Commission • Regulatory Agency---makes and enforces standards for an industry or area of economic activity • Common crimes • Price fixing • Bid rigging • Market division • Monitors mergers---illegal if it lessens competition

7. What Regulatory Roles? • Protecting Consumers, Savers, and Investors • “Caveat Emptor” • The Jungle • Unsafe at Any Speed • Investors • Federal Deposit Insurance Corporation (FDIC) insures all bank deposits for up to 100k per depositor

8. What Regulatory Roles? • Protecting Workers • Department of Labor (DOL) • OSHA---Occupational Safety and Health Administration • Sets safety and health regulations for industries • Examples: Construction workers wearing helmets, highway workers wearing reflective vests • Established in 1971, workplace fatalities have decreased by more than 60%

9. Perils of Government Regulation • Problems can occur • Overregulation • Regulation itself can be expensive • Can actually hinder economic activity • Construction worker may abandon job in order to avoid certain regulations • Balancing costs and benefits • Everyone likes clean water, but how clean does it NEED to be? • Regulatory capture—too close with the industry

10. Addressing Externalities and Public Goods • Supporting Positive Externalities • Subsidies---college grants and low interest loans • Vouchers • Public provision—government chooses to finance the production of a good or service itself • Postal service, air traffic control systems • Limiting Negative Externalities • Command and control policies---rules and enforcement • Market based policies---rely on incentives

11. Tragedy of the Commons • Negative externalities happen when property rights are not well defined • Example: Air----common resource • Can be overused and destroyed • Called the Tragedy of the Commons

12. Preserving Common Resources • Government may decide to preserve common resources • Tolls • Can be a corrective tax • Quotas • Turn public resource into a private one---Privatization • Example: Overfishing

13. Promoting Economic Well-Being • Promotes economic stability---widely accepted currency • Stimulate economic activity through tax incentives • Economic stimulus packages • Income redistribution through antipoverty programs • Progressive taxation • Welfare programs • Food stamps, public housing, school lunches • Earned Income Tax Credit • Any unintended consequences?