OUTLINE -- Chapter 5 --pp. 84-89

The Role of the Government in Market Economies

I. Structural Adjustment Policies

1. Privatization
2. Promotion of Competition
3. Limited and Reoriented Role for Government
4. Price Reform: Removing Controls
5. Joining the World Economy
6. Macroeconomic Stability

II. Review: Capitalism, Markets, and Efficiency

A. Capitalism and Limited Government

1. private property and economic growth
2. markets and prices
3. role of self interest
4. freedom of enterprise and choice
5. competition = capitalism
6. limited role for government

B. Why limited government?

III. Economic Functions of Government

A. Five Reasons for Government Involvement

1. legal and social framework
2. maintaining competition
3. redistribution of income
(correcting market failure to achieve equity)
4. reallocation of resources
(correcting market failure to achieve efficiency)
5. stabilizing unemployment and inflation and promoting economic growth

B. Legal and Social Framework

providing the legal foundation and a social environment conducive to the effective operation of the market system

C. Maintaining Competition

1. review competition

a. large numbers
b. free entry and exit

2. the problem with monopolies

a. higher prices
b. smaller quantities
C. allocative and productive inefficiency

3. role of government

a. preventing monopolies -- antitrust laws
b. regulating monopolies -- natural monopolies

D. Correcting Market Failure to Achieve Equity

1. define equity
2. how does equity affect society's satisfaction?
3. examples of income distribution

US:http://www.census.gov/ftp/pub/hhes/income/histinc/h02.html
World:

4. role of government

a. transfer payments
b. market intervention
c. progressive income taxes

E. Correcting Market Failure to Achieve Allocative Efficiency

1. Spillovers (or Externalities)

a. spillover costs

1) definition
2) examples
http://www.ryerson.ca/~ibryan/ecn104/wk9/lect9.html
3) markets and inefficiency
4) correcting for spillover costs

a) legislation
b) specific taxes
http://www.forces.com/pages/crs-tax.htm

5) failure to provide for the future

a) explanation
b) role of government

b. spillover benefits

1) definition
2) examples
3) markets and inefficiency
4) correcting for spillover benefits

a) increase demand
b) increase supply
c) government provision

c. public goods and services

1) definition
2) examples
3) markets and inefficiency
4) allocating resources to public goods

F. Stabilization

1. unemployment
2. inflation
3. role of government

a. fiscal policy
b. monetary policy