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The Role of Government (pages 502-506) Did You Know? When the label says the food is "light," what does that mean? Before an order by the Federal Drug Administration took effect in 1994, manufacturers could describe their foods any way they wanted. Descriptions such as "light," "low fat," or "lean" could mean anything. The order established definitions for such words. Now, for a label to say "light," the food must contain one-third less calories or no more than half the fat of the higher-calorie, higher-fat version. A "low fat" food must contain no more than 3 grams of fat per serving. I. Providing Public Goods (pages 502-503) A. Businesses produce mostly private goods, or goods that when consumed by one individual cannot be consumed by another. Consumption of private goods and services is determined by the exclusion principle. A person is excluded from an item's consumption unless he or she pays for it. B. Public goods are goods that can be consumed by one person without preventing consumption by another. Consumption of public goods is determined by the non-exclusion principle. No one is excluded from consuming public goods whether or not he or she pays. C. Because of the difficulty of charging for public goods, the private sector would not provide them. As a result, the government must provide public goods. It pays for them with taxes. Discussion Question If the government did not provide street lights, would we have them? Explain. (Probably not. Street lights are a public good. Everyone benefits from them, whether or not they pay, and it would be difficult to charge people for their use. Therefore, private businesses would probably not provide street lights because they could not earn a profit from doing so.) 178 II. Dealing With Externalities (pages 503-504) A. An externality is the unintended side effect of an action that affects someone not involved in the action. Public goods produce positive externalities. Everyone—not just drivers—benefits from good roads. B. Many government activities encourage positive externalities. For example, the tiny computer chips developed for the space program are now used in cars and appliances. C. The government tries to prevent negative externalities—actions that harm an uninvolved third party. For example, dumping toxic waste in a river may cut costs for a company, but the pollution would produce negative externalities for people who use the river. Discussion Question Suppose your city used tax dollars to build a stadium for a professional sports team. What are some positive externalities that might result from this action? (The stadium would bring people to the area, where they would likely buy products in local stores. People from out of town would stay in local hotels and eat at local restaurants. Also, a professional sports team gives a city prestige that could attract businesses to the area, providing more jobs for local people.) III. Maintaining Competition (pages 504-505) A. Markets work best when there are many buyers and sellers. When a market is controlled by a monopoly, or sole provider, that company can charge any price. B. Antitrust laws are intended to control monopoly power and to preserve and promote competition. The Sherman Antitrust Act of 1890 banned monopolies and other business combinations that prevented competition. The government used this law to break up AT&T to allow more competition in telephone service. C. A merger is a combination of two or more companies to form a single business. If the government feels a merger would result in less competition and higher prices for consumers, it may stop the merger. 179 Discussion Question How could a monopoly affect consumers? (In a market controlled by a monopoly, the sole provider could charge any price it wanted. Without competition from other providers, consumers would either have to pay the high price or do without the product.) IV. Regulating Market Activities (pages 505-506) A. To reduce negative externalities, governments regulate some business activities. Government agencies make sure that businesses act fairly and follow the laws. B. A natural monopoly is a market situation in which the costs of production are minimized by having a single firm produce the product. To prevent abuses, the government regulates the sole provider. C. The government requires truth in advertising and product labeling. The Federal Trade Commission deals with false advertising and product claims. The Food and Drug Administration enforces the purity, effectiveness, and labeling of food, drugs, and cosmetics. D. The government also regulates product safety. The Consumer Product Safety Commission recalls unsafe products. In a recall, a company pulls the product off the market or agrees to change it to make it safe. Discussion Question Why is it important for food labels to list the contents? (Some people are allergic to certain products like eggs, milk, and peanuts. Other people, such as diabetics, need to know the contents of food because they have to watch their sugar intake.) 180