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Chapter 6

Government's Economic Functions
 

  I. Provide a proper legal atmosphere (rules) for capitalism

 II. Insure competition 
      A. Antitrust laws protect against abuse of monopoly power.
     
B. Natural (justifiable) monopolies such as AT&T were allowed because duplicating high-cost fixed investments
           is illogical.
      C. The emphasis on free markets discussed in chapter 3 has resulted in some natural monopolies being broken into
           smaller companies which had to compete against new companies touting  new technologies.

III. Provide for an equitable distribution of income
      A. Transfer payments where a government moves general revenue to a specific group, i.e., Aid to Families with 
      
    Dependent Children and college students are examples.
      B. Market Intervention (affecting supply and demand)
           1. Minimum wage decreases supply raising price and lowering quantity.
           2. Excise taxes on alcohol, cigarettes, jewelry, etc., deceases supply.
           3. Farm price supports, aid to small business and education increases supply.
 

     C. Middle-class tax entitlements, called Tax Expenditures, (benefits) redistribute income.

            1. Mortgage interest 4. Employer-paid health insurance 7. Employer portion of social security
            2. Home equity loan interest 5. Employer-paid dental insurance 8. Employer-paid workman's compensation insurance
            3. Property taxes  

6. Employer-paid unemployment insurance

 

9. Employer paid retirement plans
Wealthy benefit most from tax subsidies: study Reuters 9/22/10

IV. Adjust for market failures
      A. Adjust for spillovers (externalities)
           1. Effects of a market system often spillover onto non-participants who are external to the market transaction. 
           2. Both costs and benefits result.
               a. Pollution hurts (costs) society so government tries to affect the supply of, and demand for, 
                   pollution causing products such as automobiles. For automobiles, they lower supply by 
                   requiring catalytic converters and they lower demand with high excise taxes. 
               b. An educated workforce benefits society so government increases demand (aid to students) and 
                   supply (aid to colleges).

    

               c. Currently, our addiction tooil has and global warming has government's attention, but little action.

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Business Week February 26, 2007
page 13.

 Relative Total Spending Hasn't Changed.

Defense Spending Moved to Social Security and Medical

      B. Providing public goods and services
          (parks, defense, etc.)
      C. Government does more in some countries
           than others.

Editors Note: Cost Data, taken from The Big Picture Blog, of  October 18, 200,7 some governments bare the cost of health insurance which increases these percentages.

economist.com/ 6/22/13 p55

 

       D. http://www.usgovernmentspending.com/year2005_0.html has government spending by major category.
       E.
Democratic Capitalism
is more costley than a Capitalistic Democracy 

V. Affecting total economic activity
     A. This includes a multitude of diverse topics. 
          1. Trying to
limit the effects of business cycles by lowering
               unemployment and inflation 
          2. Assisting companies trying to compete in the new global

              economy. Example: Decades of government sponsored
              research creating franking which could
              result in U.S. energy independence. 
          3. Using foreign aid to make sure we have stable oil prices  
              a.
Israel-United States military relations
              b. US and Foreign Aid Assistance from GlobalIssues.org
     B. Opinions differ substantially as to the responsibilities or lack of
          responsibilities government has in these areas.

  VI. Macroeconomic goals of government 7.20

VII. For more information visit
        A.
Democratic Capitalism vs. Capitalistic Democracy 
        B. The Size and Functions of Government And Economic Growth
             from the Joint Economic Committee of the United States Senate and
        C.
The 2006 Transparency International Corruption Perceptions Index
             
from Infoplease and
            
Political Corruption from the University of Exeter 
        D. Solyndra Failure explores governments attempt to foster green technology.

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Chapter 6 Class Discussion Questions

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