Download The Role of Government (pages 502-506)

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.)
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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.
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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.)
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