W A E F G ?: HAT Re The Conomic Unctions of Overnment
W A E F G ?: HAT Re The Conomic Unctions of Overnment
W A E F G ?: HAT Re The Conomic Unctions of Overnment
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LESSON 4
WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT?
INTRODUCTION CONCEPTS
In order to ensure and support economic • Competition
freedom as well as political freedom, the
• Economic stabilization
founders of the United States envisioned a
limited role for the government in economic • Externality
affairs. In a market economy such as the one
• Income redistribution
established by the U. S. Constitution, most
economic decisions are made by individual • Public goods and services
buyers and sellers, not by the government.
• Social and legal framework
Still, the U.S. government’s role in the
OBJECTIVES
economy is not trivial. It includes, most econ-
omists believe, responsibility for six major Students will be able to:
functions. The government (1) provides the
legal and social framework within which the 1. Classify government economic activities
economy operates, (2) maintains competition according to the six economic functions of
in the marketplace, (3) provides public goods government.
and services, (4) redistributes income, (5) cor- 2. Analyze governmental economic actions
rects for externalities, and (6) takes certain within the liberal/conservative framework.
actions to stabilize the economy.
CONTENT STANDARDS
Citizens, interest groups, and political
Economics (CEE Standards)
leaders disagree about the proper scope of
government activities within each of these • There is an economic role for government
functions. Over time, as society and the econ- in a market economy whenever the bene-
omy have changed, government activities in fits of a government policy outweigh its
each area have generally expanded. costs. Governments often provide for
Moreover, around the world, other societies national defense, address environmental
with market economies have generally favored concerns, define and protect property
a larger economic role for government, some- rights, and attempt to make markets more
times endorsing actions beyond the six func- competitive. Most government policies also
tions addressed in this lesson. redistribute income. (Standard 16)
• Federal government budgetary policy and
the Federal Reserve System’s monetary
LESSON DESCRIPTION policy influence the overall levels of
The teacher introduces six economic func- employment, output, and prices. (Standard
tions of government in a brief lecture. In a 20)
guided practice activity, the students classify
Civics and Government (NSCG
newspaper headlines according to the six
Standards, Grades 9-12)
functions. A brief reading introduces “liberal”
and “conservative” views of the proper scope of • The relationship of limited government to
government economic activity. The lesson con- political and economic freedom. (Standard
cludes with students working in groups to I.B.4)
develop liberal and conservative arguments
• Character of American political conflict.
about one of the newspaper headlines.
(Standard II.C.2)
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WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? LESSON 4
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LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT?
would have to barter for the goods and (Positive externalities exist when some of
services they wanted if this monetary the benefits associated with production or
system did not exist, and they might consumption “spill over” to third parties—
stay away from banks if banks were not people other than the producer or consumer
regulated.) of the product. One example is public edu-
cation. Government subsidizes education
• Maintain Competition: because its benefits flow to the students
and to society in general. We would have
Create and enforce antitrust laws, and
fewer benefits linked to education without
regulate natural monopolies.
subsidization.)
(The government sued Microsoft for monop-
oly practices; the government regulates the
• Stabilize the Economy:
prices charged by companies that distrib-
ute natural gas to homes. Companies Reduce unemployment and inflation, and
might charge higher prices and provide promote economic growth.
poor products if government policies did (The federal government attempts to stabi-
not promote competition.) lize the economy through applications of
fiscal policy [by raising or lowering taxes,
• Provide Public Goods and Services: or by government spending] and monetary
policy [by controlling the money supply or
Public goods and services are those that
by changing interest rates]. Without these
markets will not provide in sufficient
actions, the economy might take much
quantities.
longer than it ordinarily does to recover
(Examples include national defense, road-
from recessions.)
ways, post offices and mail carriers, light-
houses, public defenders, public health
• Redistribute Income:
clinics, public schools, and other important
goods and services. Some important goods Redistribute income from people who have
and services would be unavailable if the higher incomes to those with lower
government did not provide them.) incomes.
(Redistribution usually involves higher tax
• Correct for Externalities: rates for people with higher incomes. The
tax revenue raised in this way helps to pay
Reduce negative externalities.
for various welfare programs, the Medicaid
(Negative externalities exist when some of
program, legal defense clinics, etc. Some
the costs associated with production or
people could not afford basic necessities
consumption “spill over” to third parties—
without government redistribution pro-
people other than the producer or consumer
grams.)
of the product. One example is pollution of
lakes and rivers caused, for example, by
6. Distribute Activity 4.2. Explain that the 12
industrial waste. The pollution affects
newspaper headlines are fictitious but real-
everybody who uses the lakes and rivers,
istic, each one referring to a government
including those who had no part in pro-
activity. The students are to classify each
ducing or purchasing the products causing
headline by writing in the letter of the eco-
the pollution. Government regulates pollu-
nomic function that fits it best. Check the
tion. The environment would be far more
students’ answers and discuss the exercise
polluted without government action.)
in class.
Encourage increased production of
goods and services that have positive
externalities.
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WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? LESSON 4
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LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT?
3. Smoke from a factory drops ash all over your car. Government’s economic function in this case
is to
A. stabilize the economy.
B. maintain competition.
C. provide public goods and services.
D. correct a negative externality.
Constructed-Response Questions
1. Federal regulations now require Internet radio stations to pay substantial royalty fees (fees to
the artists and songwriters) for the music that they play. Some stations were not able to pay
the fees and have gone “off the air.” What economic function of government is this an example
of? Who benefits and loses from the regulation? What argument would you make for and
against the regulation?
(These regulations are an example of government policy aimed at establishing and enforcing
property rights. The protection of property rights is an element of the legal and social framework
government establishes. In this case, songwriters and artists benefit from the legal protection in
question; the regulation maintains their property rights and enhances their incentive to produce
music. Radio station operators and listeners lose. There are fewer Internet radio stations and
less choice for listeners.)
2. Many city governments subsidize the construction of sports stadiums as a way to attract or hold
on to sports teams. Write an argument for this practice, using the economic functions of govern-
ment in support of your claim. Then present an alternative view, arguing against your initial
claim.
(Public support for sports stadiums might be regarded as an example of correcting for externali-
ties. The economic argument for taxpayer-financed subsidization is that the sports teams provide
substantial external benefits. The city gains visibility that might attract new businesses and visi-
tors who will spend money in the city. Thus, many people benefit, including those who never
attend any stadium events. Opponents argue that there is little “spill-over” benefit since people
who attend stadium events do so instead of paying for other recreational activities, like going out
to restaurants, museums, or shopping in local stores. Moreover, attending a stadium event seems
to be a private activity, like going bowling or golfing or seeing a movie; those who want to partici-
pate in such activities should pay their own way.)
50 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? LESSON 4
2. Maintain Competition
6. Redistribute Income
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LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT?
ACTIVITY 4.2
CLASSIFYING GOVERNMENT ACTIONS
Directions: Below is a list of the six economic functions of government, followed by a set of 12 (fic-
titious) newspaper headlines. Decide which of the six economic functions is referred to, directly or
by implication, in each headline. Classify each headline according to the six functions by writing in
the letter of the economic function that best fits that headline.
The Headlines:
____ 10. New Info from Government Agency Helps Consumers Choose Wisely
52 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? LESSON 4
ACTIVITY 4.3
WHAT ROLE SHOULD THE GOVERNMENT PLAY IN THE
ECONOMY?
Although it is generally agreed that there is a role for the government to play in redistributing
income in favor of the poor, providing public goods and services, and dealing with externalities,
there is considerable disagreement over how far the government should go in these areas—and
about additional areas for which some people believe the government should be responsible. Some
people believe that “big government” is already a problem—that government is doing too much.
Others believe that the government sector of the economy is being starved and that government
should be allowed to do more. In the United States, the former view is associated with what is
commonly called “conservative” political thinking; the latter view is associated with “liberal”
political thinking.
Conservatives believe that the government’s role in the economy should be severely limited.
They believe that economic and political freedom will be undermined by excessive reliance on gov-
ernment. Moreover, they question the government’s ability to solve social and economic problems.
They believe that faith in the government’s power to solve these problems is unreasonable. They
point to the slowness of government bureaucracy, the difficulty in controlling huge government
organizations, the problems political considerations can breed, and the difficulties that arise when
people try to learn whether government programs are successful or not. On the basis of these con-
siderations, they argue that the government’s role should be carefully limited. They call for more
and better information about what government can reasonably be expected to do (and do well).
While conservatives often question the government’s ability to solve important social and economic
problems, liberals often question the market’s ability to solve such problems. They point to important
limitations within the market system, and they claim that the government can do a great deal to
overcome these limitations. Government can regulate private economic activity—for example,
through minimum-wage laws. It can also provide goods and services that private businesses produce
in insufficient quantities—for example, health care for the poor. In their advocacy for government
programs of this sort, liberals tend to be less concerned than conservatives about the effects on
personal freedom that may be a consequence of governmental intervention in the economy. They
are more concerned with certain consequences of market activity—contending, for example, that the
price system is unfair because it awards goods and services to those who can pay the price. In their
view, people who acquire little in the way of goods and services through market activity are forced
into lives of hardship. Liberals are, therefore, more concerned than conservatives about the unequal
distribution of income produced by market activity and are more likely to propose government
policies aimed at redistributing income in a manner that will reduce income inequality.
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LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT?
1. Suppose a U.S. Senator proposes legislation that increases taxes for higher- income taxpayers
in order to make more funds available for public education. Is this Senator more likely to have a
conservative view or a liberal view of the economic role of government?
2. A Congressional leader argues that there should be a constitutional amendment that limits the
size of the federal government. Is this policymaker more likely to be liberal or conservative?
54 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY