Ch. 23
Section 1
The Role of Government
Private Goods, Public Goods
Private Goods – are goods that when
consumed by one individual cannot be
consumed by another
Consumption is determined by the exclusion
principle – person is prevented from using
something until they pay for it
Businesses produce mostly
Private Goods, Public Goods
(cont.)
Public Goods – goods that can be consumed by one
person without preventing consumption by another.
Consumption is determined by the non-exclusion
principle – no one is excluded from use whether or not
they pay for it.
Difficult to charge for public goods, private sector does
not provide; Government must meet the needs of the
people; pays with peoples’ taxes
Dealing With Externalities
Externality – unintended side effect of an action
that affects someone not involved in the action.
Public goods from the government produce
positive externalities
Government tries to encourage positive
externalities and prevent negative
externalities
Maintaining Competition
Markets work best when there are many buyers and
sellers
Monopolies can be very harmful to the market
Antitrust laws – intended to control monopoly power
and to preserve and promote competition
Sherman Antitrust Act of 1890 banned monopolies that
prevented competition; used to break up Standard Oil
(1911) and AT&T (1984).
Maintaining Competition (cont.)
Merger – combination of two or more companies
to form a single business
If the government feels a merger would result in
less competition and higher prices for
consumers, it may stop the merger.
Hewlett Packard & Compaq = little resistance
Staples & Office Max = Gov’t said NO
Regulating Market Activities
Government regulates some business activities
to reduce negative externalities
Makes sure businesses act fairly and follow the
laws
Sometimes it makes sense to have a single firm
produce all of the goods or services for a market
Regulating Market Activities (cont.)
Natural Monopoly – market situation in which
the costs of production are minimized by having
a single firm produce the product.
To prevent abuses, government heavily
regulates the sole provider
Ex. Utility companies (water, electricity, mail
delivery, telecommunications)
Regulating Market Activities (cont.)
The government requires truth in advertising
and product labeling.
Federal Trade Commission (FTC) and Food and
Drug Administration (FDA)
FTC deals with false advertising and product
claims; FDA enforces the purity, effectiveness,
and labeling of food, drugs, and cosmetics
Regulating Market Activities (cont.)
The government regulates product safety.
The Consumer Product Safety Commission
(CPSC) recalls unsafe products.
Recall – when a company pulls the product off
the market or agrees to change it to make it
safe.