Economic Functions

1. Economic Functions 5.2.1 – Identify the functions and relationships among various institutions (e.g. business firms, banks, government agencies, labor unions, and corporations)

2. Objective: I can categorizenewspaper headlines as examples of each of the six functions of the government.

3. Essential Question: What role does the government play in the economy?

4. In order to ensure and support economic freedom, as well as political freedom, the founders of our nation envisioned a very limited role for the government in economic affairs. • In a market economy such as the one established by our Constitution, most economic decisions are made by individual buyers and sellers, not by the government. • But that doesn’t mean the government doesn’t do ANYTHING. Economists have identified six major functions of the government in market economies.

5. Legal and Social Framework • Create laws and provide courts • Provide info and services to help the economy function better • Establish a monetary system • Define and enforce property rights

6. Maintaining Competition • Create and enforce anti-trust laws (against monopolies) • Regulate natural monopolies

7. Provide public goods and services • Provide goods and services that markets are unable or unwilling to provide, such as national defense

8. Redistribute Income • Higher income tax rates for the rich than the poor • Provide social security and aid to dependent children • Medicare • Medicaid

9. Correct for Externalities • Taxes to reduce negative externalities such as environmental pollution • Subsidies to encourage positive externalities such as education • Externalities exist when some of the costs or benefits associated with the production or consumption of a product “spill over” to third parties other than the direct producer or consumer of the product

10. Stabilize the Economy • Use government budgets and/or the money supply to promote economic growth • Control inflation • Reduce unemployment

11. Economic Functions of the Gov’t. • Citizens, interest groups, even political leaders all disagree about how bug a role the government should perform within each of these functions. • Over time, as our society and economy have changed, government activities within each of these functions have expanded.

12. Economic Functions of the Gov’t. • All levels of government work to maintain the legal and social framework to provide public goods and services. • The state and national governments have the major responsibility to maintain a competitive framework, redistribute income, and deal with externalities. • The national government has the responsibility for stabilizing the economy.

13. Task • Go back to the brainstormed list on the board. • Categorize the activities you listed. Which heading do they fit under? • Now get the strips of paper out of the envelopes. Place them under the appropriate headings.

14. Essential Question: What role does the government play in the economy?

15. Objective: I can categorizenewspaper headlines as examples of each of the six functions of the government.