At the most basic level, the government makes it possible for markets to
function more efficiently by clearly defining and enforcing people’s
property or ownership rights to resources and by providing a stable
currency and a central banking system (the Federal Reserve System in the
U.S. economy). Even these basic functions require a wide range of
government programs and employees. For example, the government maintains
offices for recording deeds to property, courts to interpret contracts
and resolve disputes over property rights, and police and other law
enforcement agencies to prevent or punish theft and fraud. The Treasury
Department issues currency and coins and handles the government’s
revenues and expenditures. And as we have seen, the Federal Reserve
System controls the nation’s supply of money and availability of credit.
To perform these basic functions, the government must be able to shift
resources from private to public uses. It does this mainly through taxes,
but also with user fees for some services (such as admission fees to
national parks), and by borrowing money when it issues government bonds.
In the U.S. economy, private markets are generally used to allocate basic
products such as food, housing, and clothing. Most economists—and most
Americans—widely accept that competitive markets perform these functions
most efficiently. One role of government is to maintain competition in
these markets so that they will continue to operate efficiently. In other
areas, however, markets are not allowed to operate because other
considerations have been deemed more important than economic efficiency.
In these cases, the government has declared certain practices illegal.
For example, in the United States people are not free to buy and sell
votes in political elections. Instead, the political system is based on
the democratic rule of “one person, one vote.” It is also illegal to buy
and sell many kinds of drugs. After the Civil War (1861-1865) the
Constitution was amended to make slavery illegal, resulting in a major
change in the structure of U.S. society and the economy.
In other cases, the government allows private markets to operate, but regulates them. For example, the government makes laws and regulations concerning product safety. Some of these laws and regulations prohibit the use of highly flammable material in the manufacture of children’s clothing. Other regulations call for government inspection of food products, and still others require extensive government review and approval of potential prescription drugs.
In still other situations, the government determines that private markets result in too much production and consumption of some goods, such as alcohol, tobacco, and products that contribute to environmental pollution. The government is also concerned when markets provide too little of other products, such as vaccinations that prevent contagious diseases. The government can use its spending and taxing authority to change the level of production and consumption of these products, for example, by subsidizing vaccinations.
Even the staunchest supporters of private markets have recognized a role
for the government to provide a safety net of support for U.S. citizens.
This support includes providing income, housing, food, and medicine for
those who cannot provide a basic standard of living for themselves or
their families.
Because the federal government has become such a large part of the U.S.
economy over the past century, it sometimes tries to reduce levels of
unemployment or inflation by changing its overall level of spending and
taxes. This is done with an eye to the monetary policies carried out by
the Federal Reserve System, which also have an effect on the national
rates of inflation, unemployment, and economic growth. The Federal
Reserve System itself is chartered by federal legislation, and the
president of the United States appoints board members of the Federal
Reserve, with the approval of the U.S. Senate. However, the private banks
that belong to the system own the Federal Reserve, and its policy and
operational decisions are made independently of Congress and the
president.
Correcting Market Failures
The government attempts to adjust the production and consumption of particular goods and services where private markets fail to produce efficient levels of output for those products. The two major examples of these market failures are what economists call public goods and external benefits or costs.
Providing Public Goods
Private markets do not provide some essential goods and services, such as national defense. Because national defense is so important to the nation’s existence, the government steps in and entirely funds and administers this product.
Public goods differ from private goods in two key respects. First, a public good can be used by one person without reducing the amount available for others to use. This is known as shared consumption. An example of a public good that has this characteristic is a spraying or fogging program to kill mosquitoes. The spraying reduces the number of mosquitoes for all of the people who live in an area, not just for one person or family. The opposite occurs in the consumption of private goods. When one person consumes a private good, other people cannot use the product. This is known as rival consumption. A good example of rival consumption is a hamburger. If someone else eats the sandwich, you cannot.
The second key characteristic of public goods is called the nonexclusion
principle: It is not possible to prevent people from using a public good,
regardless of whether they have paid for it. For example, a visitor to a
town who does not pay taxes in that community will still benefit from the
town’s mosquito-spraying program. With private goods, like a hamburger,
when you pay for the hamburger, you get to eat it or decide who does.
Someone who does not pay does not get the hamburger.
Because many people can benefit from the same pubic goods and share in their consumption, and because those who do not pay for these goods still get to use them, it is usually impossible to produce these goods in private markets. Or at least it is impossible to produce enough in private markets to reach the efficient level of output. That happens because some people will try to consume the goods without paying for them, and get a free ride from those who do pay. As a result, the government must usually take over the decision about how much of these products to produce. In some cases, the government actually produces the good; in other cases it pays private firms to make these products.
The classic example of a public good is national defense. It is not a rival consumption product, since protecting one person from an invading army or missile attack does not reduce the amount of protection provided to others in the country. The nonexclusion principle also applies to national defense. It is not possible to protect only the people who pay for national defense while letting bombs or bullets hit those who do not pay. Instead, the government imposes broad-based taxes to pay for national defense and other public goods.
Adjusting for External Costs or Benefits
There are some private markets in which goods and services are produced, but too much or too little is produced. Whether too much or too little is produced depends on whether the problem is one of external costs or external benefits. In either case, the government can try to correct these market failures, to get the right amount of the good or service produced.
External costs occur when not all of the costs involved in the production or consumption of a product are paid by the producers and consumers of that product. Instead, some of the costs shift to others. One example is drunken driving. The consumption of too much alcohol can result in traffic accidents that hurt or kill people who are neither producers nor consumers of alcoholic products. Another example is pollution. If a factory dumps some of its wastes in a river, then people and businesses downstream will have to pay to clean up the water or they may become ill from using the water.
When people other than producers and consumers pay some of the costs of producing or consuming a product, those external costs have no effect on the product’s market price or production level. As a result, too much of the product is produced considering the overall social costs. To correct this situation, the government may tax or fine the producers or consumers of such products to force them to cover these external costs. If that can be done correctly, less of the product will be produced and consumed.
An external benefit occurs when people other than producers and consumers enjoy some of the benefits of the production and consumption of the product. One example of this situation is vaccinations against contagious diseases. The company that sells the vaccine and the individuals who receive the vaccine are better off, but so are other people who are less likely to be infected by those who have received the vaccine. Many people also argue that education provides external benefits to the nation as a whole, in the form of lower unemployment, poverty, and crime rates, and by providing more equality of opportunity to all families.
When people other than the producers and consumers receive some of the
benefits of producing or consuming a product, those external benefits are
not reflected in the market price and production cost of the product.
Because producers do not receive higher sales or profits based on these
external benefits, their production and price levels will be too
low–based only on those who buy and consume their product. To correct
this, the government may subsidize producers or consumers of these
products and thus encourage more production.
Maintaining Competition
Competitive markets are efficient ways to allocate goods and services
while maintaining freedom of choice for consumers, workers, and
entrepreneurs. If markets are not competitive, however, much of that
freedom and efficiency can be lost. One threat to competition in the
market is a firm with monopoly power. Monopoly power occurs when one
producer, or a small group of producers, controls a large part of the
production of some product. If there are no competitors in the market, a
monopoly can artificially drive up the price for its products, which
means that consumers will pay more for these products and buy less of
them. One of the most famous cases of monopoly power in U.S. history was
the Standard Oil Company, owned by U.S. industrialist John D.
Rockefeller. Rockefeller bought out most of his business rivals and by
1878 controlled 90 percent of the petroleum refineries in the United
States.
Страницы: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21
