WHAT’S THE ROLE OF GOVERNMENT IN A MARKET ECONOMY?

SIX POTENTIAL FUNCTIONS:

ADDRESS EXTERNALITIES PROVIDE PUBLIC GOODS ENHANCE PUBLIC SAFETY PURSUE ANTI-TRUST ACTIVITIES REGULATE CHOICE REDISTRIBUTE INCOME

ANTI-TRUST/PUBLIC SAFETY

ANTI-TRUST:

* EVALUATING, REGULATING, OR BREAKING-UP MONOPOLIES

* PROSECUTING COLLUSIVE OLIGOPOLIES

PRICE FIXING

MAKE SURE FIRMS IN AN OGOPOLISTIC MARKET STRUCTURE DON’T “COORDINATE” THEIR PRICES; THAT IS, MAKE SURE THEY STILL COMPETE ON PRICE

PROBLEM: PERFECT COMPETITION RESULTS IN PRICES FOR SAME PRODUCTS BEING THE SAME!!

MERGERS

“ANTI-TRUST” ALSO LOOKS AT MERGERS TO MAKE SURE THEY ARE NOT ANTI-COMPETITIVE

HORIZONTAL – BOTH COMPANIES PRODUCE SAME PRODUCT/SERVICE (COMCAST, TIME-WARNER)

VERTICAL – COMPANIES ARE AT DIFFERENT STAGES OF PRODUCTION (COMCAST, NBC-UNIVERSAL)

COMGLOMERATE – TWO UNRELATED COMPANIES (MICROSOFT, QUAKER)

PUBLIC SAFETY

WHAT IS IT?

PROTECTING OWNERSHIP

ENFORCING CONTRACTS

LAWS, POLICE, AND COURTS

WHY IMPORTANT?

IF PROPERTY OWNERSHIP NOT PROTECTED, WHY INVEST IN IT?

IF CONTRACTS NOT ENFORCED, WHY ENTER INTO THEM?

PUBLIC SAFETY AND ECONOMIC DEVELOPMENT

PROTECTING PRIVATE PROPERTY AND ENFORCING CONTRACTS IS A KEY TO ECONOMIC DEVELOPMENT

COUNTRIES WHICH DON’T DO THIS HAVE LAGGED