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Roles of Government in a mixed
economy
Government in the Circular Flow Model




Supplies goods and
services to business
firms and
households
Demands resources
in resource markets
Taxes household
income and business
revenues
Transfers income to
households
7 Roles of Government in a mixed
economy
1.
Establishing and
enforcing rules
of exchange
a.Property rights
b.Contract law
7 Roles of Government in a mixed
economy
2.
Promoting competition/prevent
anticompetitive practices
7 Roles of Government in a mixed
economy
3.

Regulating natural monopolies
One firm that can serve the entire market
at a lower per- unit cost than can two or
more firms
7 Roles of Government in a mixed
economy
4.
Provide public goods
Technical characteristics of public goods:


Non rival consumption
High cost of excluding those who do not pay
Public v. private goods
Cost of exclusion→
high
Pure public
Private
0
high
Degree of rivalness→
7 Roles of Government in a mixed
economy
5.
Dealing with
externalities
Externality is a cost or
benefit that falls on
third parties and is
therefore ignored by the
two parties to the
market transaction
a. Negative
externality – cost
imposed on others
b. Positive externality
– benefit gained by
others
Visibility Impairment from Air Pollution
Shenandoah National Park - Virginia
7 Roles of Government in a mixed
economy
6.
Redistribute income
President F.D. Roosevelt Signing the Social Security Act of 1935
7 Roles of Government in a mixed
economy
7.
Promote macroeconomic goals of:
a. Full employment
b. Price stability
c. Economic growth
Monetary policy pursued
by the Federal Reserve
Fiscal policy pursued by
the Federal government