Roles of the Government & Monopolies - Ch. 23, Section 1
Roles of the Government
1. Provide Goods & Services
· Private goods
o Exclusion Principle – a person is excluded from an item’s consumption unless he/she pays for it
o Mostly businesses provide private goods
o Examples
· Public goods
o Non-Exclusion Principle – no one is excluded from a good or service whether or not they pay
o The government provides public goods
o Examples
2. Handle Externalities
· Externality – unintended side effect of an action
o Public goods provide positive externalities because everyone benefits from them
o Promotes positive externalities
· Examples
o Prevents negative externalities
· Examples
3. Regulate Market Activities
o By regulations, the government reduces negative externalities
o FTC – Federal Trade Commission – regulates truth in advertising
o Example
o FDA – Food & Drug Administration – enforces purity, effectiveness and labeling of food, drugs & cosmetics
o Recall – company pulls product or changes it
o Example – Peanut recall, Chinese lead based toys
o CPSC – Consumer Product Safety Commission – recalls unsafe products
o Example
o Pg. 632 for other regulatory agencies
4. Ensures Competition
· Competition is fundamental to a market economy
· Exists if different businesses produce similar products
· Monopoly – One group controls the market
· Anti-trust laws – intended to control monopoly power & promote competition
· Sherman Anti-trust Act – 1890
· Theodore Roosevelt – the “Trust-Buster” – Northern Securities
· AT&T – Ma-Bell
· Mergers – combination of two or more companies to form a single business
o Government will stop if competition will be decreased
o Horizontal Merger – Companies in the same business
o Vertical Merger – Company joins with one it buys from
o Conglomerate – Buying of un-related businesses
§ Example: GE (power plants, light bulbs, etc)
Perfect Competition
· Large markets – requires a large amount of buyers & sellers
· Similar products
· Easy Entry & Exit
· Information obtainable for Buyers
· No control over price – Market price is the equilibrium price (decided by supply & demand)
Imperfect Competition
· Imperfect Competition
o One group can affect price
· Monopoly – one group controls all of the market
o Single seller
o No substitutes
o No easy entry
o Controls the market price – suppliers can raise prices without losing business
Types of Monopolies
· Natural: Control of resources – the government allows these but regulates them
· Geographic: control of a location
· Technological: Patent owned on technology
· Government: created by the government. – Illegal to enter
· Cartel: International form of monopoly
o Example: OPEC
Barriers to Entry
· Government regulations: Technological or Government or regulations are too expensive
· Cost of getting started: Large amounts of capital are needed
· Ownership of Raw Materials: Companies control materials & do not sell to competitors
Oligopoly
· Domination of a few businesses in competition
· Barriers to entry
· Identical or slightly different products
· Some control of price
Roles of the Government & Monopolies - Ch. 23, Section 1
Roles of the Government
1. Provide Goods & Services
· ______
· Exclusion Principle – ______
· Mostly businesses provide private goods
· Examples ______
· ______
· ______– no one is excluded from a good or service whether or not they pay
o ______
o Examples ______
2. Handle ______
· Externality – ______
o ______provide positive externalities because everyone benefits from them
o ______
§ Examples ______
o Prevents negative externalities
§ Examples ______
3. Regulate Market Activities
· ______reduces negative externalities
o FTC – ______– regulates truth in advertising
o Example
o ______– Food & Drug Administration – ______
o ______– company pulls product or changes it
§ Example – Peanut recall, Chinese lead based toys
o CPSC – ______– recalls unsafe products
o Example Pg. 632 for other regulatory agencies
4. Ensures Competition
· Competition is fundamental to a market economy
· ______
· ______– One group controls the market
· ______– intended to control monopoly power & promote competition
· Sherman Anti-trust Act – 1890
· ______
· AT&T – Ma-Bell
· Mergers – ______to form a single business
o Government will stop if competition will be decreased
o ______– Companies in the same business
o Vertical Merger – ______
o Conglomerate – ______
§ Example: GE (power plants, light bulbs, etc)
Perfect Competition
· ______– requires a large amount of buyers & sellers
· ______
· ______
· Information obtainable for Buyers
· ______– Market price is the equilibrium price (decided by supply & demand)
Imperfect Competition
· Imperfect Competition
o One group can affect price
· Monopoly – ______
o Single seller
o ______
o No easy entry
o ______– suppliers can raise prices without losing business
Types of Monopolies
· Natural: ______– the government allows these but regulates them
· Geographic: ______
· ______: Patent owned on technology
· Government: created by the government. – ______
· Cartel: ______
o Example: OPEC
Barriers to Entry
· ______: Technological or Government or regulations are too expensive
· ______: Large amounts of ______are needed
· Ownership of ______: Companies control materials & do not sell to competitors
Oligopoly
· Domination of a few businesses in competition
· ______
· Identical or slightly different products
· Some control of price