The Role of Government in The Role of Government in a Market Economya Market Economy

1. Provide a legal system1. Provide a legal system

Make and Make and enforce laws and enforce laws and to protect to protect private property private property rights.rights.

2. Maintain competition2. Maintain competition

Regulate Regulate monopoliesmonopolies..

3. Redistribute income3. Redistribute income

Tax those with Tax those with larger incomes and larger incomes and help those in need.help those in need.

Transfer paymentsTransfer payments

4. Reallocate resource.4. Reallocate resource.

*Correct *Correct market failuresmarket failures

*Address *Address externalitiesexternalities

( unintended side ( unintended side effects to a third effects to a third party uninvolved in party uninvolved in the activity/AKA the activity/AKA spillover costs and spillover costs and benefitsbenefits).).

**Public v. private goodsPublic v. private goods

5. Stabilize the economy5. Stabilize the economy

Reduce Reduce unemployment and unemployment and inflation and inflation and promote economic promote economic growth.growth.

FiscalFiscal (tax/spend) (tax/spend) and and monetarymonetary(money (money supply) policysupply) policy

Fiscal FederalismFiscal Federalism

State and local State and local governments governments have seen tax have seen tax revenue diprevenue dip

Shortfalls often Shortfalls often covered by grants covered by grants or transfers from or transfers from Federal govtFederal govt

DEFINITION: DEFINITION: system of system of intergovernmentintergovernmental transfersal transfers