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Government and the Economy Chapter 11 Essential Question: How should the U.S. government carry out its economic roles? The government, the economy, and you • Laissez-faire economics – government should stay out of the economy…let market forces (supply & demand) run it. • Thomas Jefferson – “The gov’t that governs least, governs best.” • Tea party – Says to the gov’t, “Just leave me alone.” • But, gov’t is everywhere (read intro p207-208) • Can gov’t get involved in economy? We must look at the… • …Constitution: • Gov’t can: tax, “provide for the general welfare”, borrow, regulate interstate & foreign trade, handle bankruptcy, coin $, set weights/measures, handle patents & inventions • So, gov’t sets regulations – rules set/enforced by the government Property rights • We value private property in America. It gives incentives to… • …work hard and be productive to earn things. • Compare this to a communist country – what your earn/make goes to the government, not you. • Government protects property rights… • Law protects if someone takes from you • U.S. Patent and Trademark office protects “intellectual property” • Gov’t can also TAKE private property • Eminent Domain (Fifth Amendment) – gov’t can take private property if it’s “for public use”. Think of a highway going through or widening and a house is in the way. Regulation • We value private property & gov’t leaving us alone, but… • …the gov’t regulates us, our property, and businesses. • Example: gov’t ensures there is competition (not a monopoly). • Gov’t forbids/regulates… • Price fixing – “competitors” agree on a price • Bid rigging – instead of competing bids, they work together to bid low • Market division – agree to split the market, like splitting areas • Mergers – we don’t want them to merge, b/c we’ll get too few competitors (think airlines, phone companies—there’s only a few right now, if they merged there would be VERY few) Good & Bad of Regulation • Good • Helps with competition • Protection (think FDIC and insurance of deposits in banks) • Safety (think seatbelts, EXIT signs) • Bad • Businesses say many regulations are unnecessary; they get in the way • Deregulation sometimes results. It’s scaling back the regulations (it’s a hot topic between Democrats and Republicans). Externalities & common goods • Externalities – extra or spillover effects of production/consumption • Think pollution or trash • Gov’t regulates externalities • Command-and-control policies – simply “thou shalt not” rules • Market-based policies – are preferred b/c they try to put incentives to work, like… • Setting a fee per garbage bag (incentive is to make less trash) • Setting an “up-to” limit on pollution (OK to pollute up to a level) • Giving $, called subsidies, to encourage something • Key here: $ amounts put to use Commons goods • Some things are not privately owned, but are common, like… • …air, fish in the ocean, stone crabs • Tragedy of the commons – resources can be easily overused and ruined (think cows in the common pasture) • It’s hard for gov’t to regulate these things; community groups might be better at it.