III The Role of the Government in the American Economy

What ought to be the role of the government in the economy? This question has been debated since the founding of our republic? Today’s economists are divided over government’s role. Some, like Adam Smith, would argue for the return of laissez fair, reducing the government’s role in economic affairs. Others favor more active participation. Despite their differences, however, almost all would agree that the following economic responsibilities are best fulfilled by government:

Safeguarding the market system

Providing public goods and services

Dealing with externalities

Assisting those in need

Helping specific groups

Stabilizing the economy

Let’s take a closer look at government’s economic responsibilities.

Safeguarding the market system In the world that Adam Smith described, many small business firms competed for the consumer’s dollar. Competition forced sellers to produce the things consumers wanted, at the lowest possible prices. Sellers whose products did not measure up in price or quality lost sales and faced the chance of failure. Meanwhile, the ongoing efforts to reduce costs and improve quality resulted in a more efficient use of the economy’s limited resources.

Quite opposite is true where there is little or no competition. Consumers cannot take their business elsewhere, nor is the need to reduce costs and eliminate waste as urgent. Prices in these circumstances are determined by the producers themselves rather than in the marketplace. For these reasons, a lack of competition is likely to lead to higher prices, wasted resources, and lower living standards since the public would be able to afford fewer goods.

To protect the market system, Congress and the state legislatures have enacted antitrust legislation. These laws prohibit practices that reduce competition and increase the power of monopolies. Monopolies are firms that have so much control over a market that they can set the price at which their goods are sold. The federal government has also taken steps to encourage competition. In recent years, rules and regulations affecting the airline, trucking and banking industries have been adjusted to allow more competition.

IV

Providing public goods and services

Every business day commuters slowly make their way through traffic to and from their jobs. Along the way, they see many reminders of government’s role in the economy. The roads they travel, the traffic lights and signs, the police and highway maintenance crews are furnished by the government.

Government provides these goods and services because private enterprise is unable, or unwilling, to do so. Items that cannot be provided by market system and so must be furnished by the government are known as public goods and services. National defense, street lighting, parks, airports and mosquito control are examples of public goods and services.

There are two reasons the market system does not provide public goods and services:

1. There is no easy way to charge individual users or to exclude them from the benefits of the service.

Street lamps light the way for all in a downtown neighborhood. There is no way that those who did not pay for this service could be excluded from benefiting from the lights.

The benefits of a national highway system and the protection provided by a country’s armed forces, for example, extend to all citizens.

2. Anticipated profits from the product or service do not justify a private firm investment.

Local, national and state parks are so expensive to build and maintain that private companies could not charge high enough entry fees to make a profit.

The expense of designing and perfecting rockets for space exploration was too great for individual firms to take. Now that our technology has improved, private businesses are launching their own satellites.