How much government is too much government?Crust – Each pound of flour must contain 2.9 mg thiamine, 24 mg niacin, and at least 13 – but not more than 16 mg of iron.

Beef – Ground beef must be no more than 30 % fat.

Mushrooms - Only vitamin C and water allowed in canned mushrooms

Tomato Sauce – Must be of the “reddish” variety, with at least 24% “natural tomato soluble solids”

Mozzarella Cheese – must be at least 30% and no more than 45% fat and from pasteurized cow’s milk

Pepperoni – 18 to 21% protein content required

Is ThisTOO MUCH

GOVERNMENT?

That government is best which governs the least, because its people discipline themselves.

Thomas Jefferson

The paradox of planning “is The paradox of planning “is that it (a planned economy) that it (a planned economy) cannot plan, because of the cannot plan, because of the absence of economic absence of economic calculation. (no price calculation. (no price system).system).

What is called a planned What is called a planned economy is no economy at economy is no economy at all. It is just a system of all. It is just a system of groping about in the dark.groping about in the dark.

Ludwig von MisesLudwig von Mises

Adam SmithThe Father of Market EconomicsThe Wealth of Nations 1776

The Declaration of Economic Independencereaction to mercantilism

Smith’s Key Idea - “Invisible Hand”Individual self-interest (incentive) and competition work together to benefit all of society.

Markets Willing Buyer & Seller

Buyers & Sellers Communicate by Negotiating a Price

• Three Functions of Prices -Transmit information- Provide Incentives- Determine the Distribution of Income

Adam SmithDuties of Government

• Provide for the common defense

• Provide a system of Justice- Rule of law- Protect Property Rights

• Provide Goods and Services which the market will not provide. (public goods)

• Laissez –faire (gov’t - hands off the rest)

Economic Functions of Government Today

1 – Establish the Legal and Social framework of society

a) Referee economic relationships– Pure Food and Drug Act 1906– Labor-management law– Contract law– Copyrights & Patents

Legal and Social Framework

b) Provide basic government services– Police and Fire

Legal and Social Framework

• Provide basic government services– Police and Fire– Weights and Measures

Legal and Social Framework

• Provide basic government services– Police and Fire– Weights and Measures– Monetary System

2 Maintain Competition by Controlling Monopolies

• Regulate “natural” monopolies– Electric power

• Anti-trust (monopoly) laws– Sherman 1890– Clayton 1914– Regulate business

behavior and promote competition

Fix the “failures” of the Market System

3 - Reallocate resources where markets produce the “wrong” quantities.

• Externalities – third party is affected

a) Spillover costs – ex. Pollution- Legislation – limits on amounts- Taxes – attempt to internalize the

cost- Market – create a market solution

(Property Rights)

Just after noon on Monday, a corner of the sludge reservoir broke, sending caustic goo into the surrounding countryside, turning four prosperous, picturesque villages into red-tinged towns out of science-fiction horror films. The mud drowned at least four people and sent more than 100 to hospitals with burns, caused by a highly alkaline caustic substance. Sixteen square miles of land are covered in the muck, hundreds of residents suffered mild burns or lung irritations, and countless animals succumbed. Residents here are still waiting for Hungarian officials to release their analysis of the sludge’s exact chemical content. A dangerous pollutant at best because of its caustic nature, red mud from aluminum production can contain heavy metals and low-level radioactivity, ingredients that can cause health problems like cancer and produces long-term contamination of the environment. New York Times Oct 6, 2010

b) Spillover benefits ex) vaccinations, education

- increase demand – subsidy to consumerfood stamps

- increase supply – subsidy to producerhospitals, education(university)

- government produce fire protection, health services,

education(primary & secondary)

C) Public Goods and Services• Too expensive to

individual consumer• Cannot be limited to

those who pay for them• Free-rider Problem

– Lighthouses– Flood Control– National Defense

• Quasi-public goods– Parks– Medical Care– Education

4 Redistribute income and wealth(fix the problem of inequity)Social Securitywelfareunemployment insurancehealth insuranceprogressive income taxes

5 Stabilize economy by controlling inflation and unemployment

Fiscal PolicyMonetary Policy

(covered in Business Cycle Unit)