LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF …

1 45 FOCUS:UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NYLESSON4 WHATARE THEECONOMICFUNCTIONS OFGOVERNMENT?45 FOCUS:UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NYINTRODUCT IONIn order to ensure and support economicfreedom as well as political freedom, thefounders of the United States envisioned alimited role for the government in economicaffairs. In a market economy such as the oneestablished by the U. S. Constitution, mosteconomic decisions are made by individualbuyers and sellers, not by the , the government s role in theeconomy is not trivial. It includes, most econ-omists believe, responsibility for six majorfunctions. The government (1) provides thelegal and social framework within which theeconomy operates, (2) maintains competitionin the marketplace, (3) provides public goodsand services, (4) redistributes income, (5) cor-rects for externalities, and (6) takes certainactions to stabilize the , interest groups, and politicalleaders disagree about the proper scope ofgovernment activities within each of thesefunctions.

2 Over time, as society and the econ-omy have changed, government activities ineach area have generally , around the world, other societieswith market economies have generally favoreda larger ECONOMIC role for government, some-times endorsing actions beyond the six func-tions addressed in this DESCRIPTIONThe teacher introduces six ECONOMIC func-tions of government in a brief lecture. In aguided practice activity, the students classifynewspaper headlines according to the sixfunctions. A brief reading introduces liberal and conservative views of the proper scope ofgovernment ECONOMIC activity. The LESSON con-cludes with students working in groups todevelop liberal and conservative argumentsabout one of the newspaper Competition ECONOMIC stabilization Externality Income redistribution Public goods and services Social and legal framework OBJECTIVESS tudents will be able to:1.

3 Classify government ECONOMIC activitiesaccording to the six ECONOMIC FUNCTIONS Analyze governmental ECONOMIC actionswithin the liberal/conservative STANDARDSE conomics (CEE Standards) There is an ECONOMIC role for governmentin a market economy whenever the bene-fits of a government policy outweigh itscosts. Governments often provide fornational defense, address environmentalconcerns, define and protect propertyrights, and attempt to make markets morecompetitive. Most government policies alsoredistribute income. (Standard 16) Federal government budgetary policy andthe Federal Reserve System s monetarypolicy influence the overall levels ofemployment, output, and prices. (Standard20)Civics and Government (NSCGS tandards, Grades 9-12) The relationship of limited government topolitical and ECONOMIC freedom. ( ) Character of American political conflict.(Standard )46 FOCUS:UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NYLESSON4 WHATARE THEECONOMICFUNCTIONS OFGOVERNMENT?

4 47 FOCUS:UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NY Major responsibilities of the nationalgovernment in domestic and foreign policy.(Standard )TIME REQUIRED90 minutesMATERIALS A transparency of Visual A copy for each student of Activities , , and Tell the students that the purpose of thislesson is to examine the ECONOMIC func-tions of government. Ask the class tosuggest some ECONOMIC activities of local,state, and national governments. Listseveral responses on the board.(Possibleresponses include providing for nationaldefense, providing low-cost meals at school,paying Social Security benefits, buildingand repairing roads, etc.)2. Point out that government coulddo allsorts of things. For example, it could pro-vide everyone with an MP3 player, or pro-vide everyone with an annual vacation ata theme park. Ask: What problems mightarise if the government expanded its rolealong these lines?

5 (These new programswould cost a lot of money. To pay for them,people would have to pay higher taxes would create ECONOMIC ineffi-ciencies. And people not interested in MP3players or theme parks would object thattheir tax money was being wasted.)3. Pose another hypothetical example, thistime concerning government regulation:Government imposes lots of rules in theeconomy workplace safety regulations,for example. But some things still gounregulated. Why not regulate in everyproblem area? What would happen if thegovernment decided that all new cars pro-duced in the United States must be yellow,since yellow cars are easier for other driv-ers to see? What might be problematicabout that? (Many Americans would objectto such a restriction of their freedom ofchoice. Finding one s own yellow car in aparking lot full of yellow cars might bedifficult. The yellow-only rule mightencourage people who don t like yellow topurchase cars manufactured outside theUnited States, or to repaint their yellowcars illegally.)

6 4. Review the examples discussed thus far,real and hypothetical: from governmentalprovisions for national defense to govern-ment-sponsored vacations for that most Americans (not all)agree that government should do some ofthese things and should not do others, forvarious reasons. But what reasons? Whatgeneral ideas might Americans look to forguidance in thinking about the govern-ment s proper, limited role in the nation seconomy? Economists who study this ques-tion have a six-part answer. They general-ly contend (again, not all of them) thatgovernment has six legitimate FUNCTIONS toperform within the economy. Theclass now will turn to a consideration ofthese six Display Visual and distribute copies ofit (Visual also serves as Activity ).Explain each of the six ECONOMIC functionsof government. Solicit examples from thestudents for each function, and ask whatwould happen if government did not per-form this function.

7 Have the studentswrite examples and notes on their copiesof the activity. Maintain the Legal and SocialFramework:Define and enforce property rights.(Government passes laws and estab-lishes a court system. No one could sellproperty, invest, or have confidence incontracts if this legal system did notexist.)Establish a monetary system.(The federal government controls theamount of money circulating in theeconomy; it also regulates banks andother financial institutions. PeopleWHATARE THEECONOMICFUNCTIONS OFGOVERNMENT? LESSON4 LESSON4 WHATARE THEECONOMICFUNCTIONS OFGOVERNMENT?48 FOCUS:UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NYwould have to barter for the goods andservices they wanted if this monetarysystem did not exist, and they mightstay away from banks if banks were notregulated.) Maintain Competition:Create and enforce antitrust laws, andregulate natural monopolies.

8 (The government sued Microsoft for monop-oly practices; the government regulates theprices charged by companies that distrib-ute natural gas to homes. Companiesmight charge higher prices and providepoor products if government policies didnot promote competition.) Provide Public Goods and Services:Public goods and services are those thatmarkets will not provide in sufficientquantities.(Examples include national defense, road-ways, post offices and mail carriers, light-houses, public defenders, public healthclinics, public schools, and other importantgoods and services. Some important goodsand services would be unavailable if thegovernment did not provide them.) Correct for Externalities:Reduce negative externalities.(Negative externalities exist when some ofthe costs associated with production orconsumption spill over to third parties people other than the producer or consumerof the product.)

9 One example is pollution oflakes and rivers caused, for example, byindustrial waste. The pollution affectseverybody who uses the lakes and rivers,including those who had no part in pro-ducing or purchasing the products causingthe pollution. Government regulates pollu-tion. The environment would be far morepolluted without government action.)Encourage increased production of goods and services that have positiveexternalities.(Positive externalities exist when some ofthe benefits associated with production orconsumption spill over to third parties people other than the producer or consumerof the product. One example is public edu-cation. Government subsidizes educationbecause its benefits flow to the studentsand to society in general. We would havefewer benefits linked to education withoutsubsidization.) Stabilize the Economy:Reduce unemployment and inflation, andpromote ECONOMIC growth.(The federal government attempts to stabi-lize the economy through applications offiscal policy [by raising or lowering taxes,or by government spending] and monetarypolicy [by controlling the money supply orby changing interest rates].

10 Without theseactions, the economy might take muchlonger than it ordinarily does to recoverfrom recessions.) Redistribute Income:Redistribute income from people who havehigher incomes to those with lowerincomes.(Redistribution usually involves higher taxrates for people with higher incomes. Thetax revenue raised in this way helps to payfor various welfare programs, the Medicaidprogram, legal defense clinics, etc. Somepeople could not afford basic necessitieswithout government redistribution pro-grams.)6. Distribute Activity Explain that the 12newspaper headlines are fictitious but real-istic, each one referring to a governmentactivity. The students are to classify eachheadline by writing in the letter of the eco-nomic function that fits it best. Check thestudents answers and discuss the exercisein :UNDERSTANDINGECONOMICS INCIVICS ANDGOVERNMENT COUNCIL FORECONOMICEDUCATION,NEWYORK,NYWHATARE THEECONOMICFUNCTIONS OFGOVERNMENT?