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The Role of Government in a Market Economy

Explore the crucial functions of government in a market economy including maintaining competition, redistributing income, addressing market failures, and stabilizing the economy. Learn about fiscal federalism and how governments reallocate resources to ensure economic stability.

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The Role of Government in a Market Economy

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  1. The Role of Government in a Market Economy

  2. 1. Provide a legal system • Make and enforce laws and to protect private property rights.

  3. 2. Maintain competition • Regulate monopolies.

  4. 3. Redistribute income • Tax those with larger incomes and help those in need. • Transfer payments

  5. 4. Reallocate resource. *Correct market failures *Address externalities ( unintended side effects to a third party uninvolved in the activity/AKA spillover costs and benefits). *Public v. private goods

  6. 5. Stabilize the economy • Reduce unemployment and inflation and promote economic growth. • Fiscal (tax/spend) and monetary(money supply) policy

  7. Fiscal Federalism • State and local governments have seen tax revenue dip • Shortfalls often covered by grants or transfers from Federal govt • DEFINITION: system of intergovernmental transfers

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