United States ECONOMY! (U.S. Economy), страница 10

Other kinds of goods and services (such as health care and higher education) are produced and consumed in private markets, but the government attempts to increase the amount of these products available in the economy. For yet other goods and services, the government acts to decrease the amount produced and consumed; these include alcohol, tobacco, and products that create high levels of pollution. These special cases where markets fail to produce the right amount of certain goods and services mean that the government has a large and important role to play in adjusting some production patterns in the U.S. economy. But economists and other analysts have also found special reasons why government policies and programs often fail, too.

At the most basic level, the government makes it possible for markets to function more efficiently by clearly defining and enforcing people’s property or ownership rights to resources and by providing a stable currency and a central banking system (the Federal Reserve System in the U.S. economy). Even these basic functions require a wide range of government programs and employees. For example, the government maintains offices for recording deeds to property, courts to interpret contracts and resolve disputes over property rights, and police and other law enforcement agencies to prevent or punish theft and fraud. The Treasury Department issues currency and coins and handles the government’s revenues and expenditures. And as we have seen, the Federal Reserve System controls the nation’s supply of money and availability of credit. To perform these basic functions, the government must be able to shift resources from private to public uses. It does this mainly through taxes, but also with user fees for some services (such as admission fees to national parks), and by borrowing money when it issues government bonds.

In the U.S. economy, private markets are generally used to allocate basic products such as food, housing, and clothing. Most economists—and most Americans—widely accept that competitive markets perform these functions most efficiently. One role of government is to maintain competition in these markets so that they will continue to operate efficiently. In other areas, however, markets are not allowed to operate because other considerations have been deemed more important than economic efficiency. In these cases, the government has declared certain practices illegal. For example, in the United States people are not free to buy and sell votes in political elections. Instead, the political system is based on the democratic rule of “one person, one vote.” It is also illegal to buy and sell many kinds of drugs. After the Civil War (1861-1865) the Constitution was amended to make slavery illegal, resulting in a major change in the structure of U.S. society and the economy.

In other cases, the government allows private markets to operate, but regulates them. For example, the government makes laws and regulations concerning product safety. Some of these laws and regulations prohibit the use of highly flammable material in the manufacture of children’s clothing. Other regulations call for government inspection of food products, and still others require extensive government review and approval of potential prescription drugs.

In still other situations, the government determines that private markets result in too much production and consumption of some goods, such as alcohol, tobacco, and products that contribute to environmental pollution. The government is also concerned when markets provide too little of other products, such as vaccinations that prevent contagious diseases. The government can use its spending and taxing authority to change the level of production and consumption of these products, for example, by subsidizing vaccinations.

Even the staunchest supporters of private markets have recognized a role for the government to provide a safety net of support for U.S. citizens. This support includes providing income, housing, food, and medicine for those who cannot provide a basic standard of living for themselves or their families.

Because the federal government has become such a large part of the U.S. economy over the past century, it sometimes tries to reduce levels of unemployment or inflation by changing its overall level of spending and taxes. This is done with an eye to the monetary policies carried out by the Federal Reserve System, which also have an effect on the national rates of inflation, unemployment, and economic growth. The Federal Reserve System itself is chartered by federal legislation, and the president of the United States appoints board members of the Federal Reserve, with the approval of the U.S. Senate. However, the private banks that belong to the system own the Federal Reserve, and its policy and operational decisions are made independently of Congress and the president.

Correcting Market Failures

The government attempts to adjust the production and consumption of particular goods and services where private markets fail to produce efficient levels of output for those products. The two major examples of these market failures are what economists call public goods and external benefits or costs.

Providing Public Goods

Private markets do not provide some essential goods and services, such as national defense. Because national defense is so important to the nation’s existence, the government steps in and entirely funds and administers this product.

Public goods differ from private goods in two key respects. First, a public good can be used by one person without reducing the amount available for others to use. This is known as shared consumption. An example of a public good that has this characteristic is a spraying or fogging program to kill mosquitoes. The spraying reduces the number of mosquitoes for all of the people who live in an area, not just for one person or family. The opposite occurs in the consumption of private goods. When one person consumes a private good, other people cannot use the product. This is known as rival consumption. A good example of rival consumption is a hamburger. If someone else eats the sandwich, you cannot.

The second key characteristic of public goods is called the nonexclusion principle: It is not possible to prevent people from using a public good, regardless of whether they have paid for it. For example, a visitor to a town who does not pay taxes in that community will still benefit from the town’s mosquito-spraying program. With private goods, like a hamburger, when you pay for the hamburger, you get to eat it or decide who does. Someone who does not pay does not get the hamburger.

Because many people can benefit from the same pubic goods and share in their consumption, and because those who do not pay for these goods still get to use them, it is usually impossible to produce these goods in private markets. Or at least it is impossible to produce enough in private markets to reach the efficient level of output. That happens because some people will try to consume the goods without paying for them, and get a free ride from those who do pay. As a result, the government must usually take over the decision about how much of these products to produce. In some cases, the government actually produces the good; in other cases it pays private firms to make these products.

The classic example of a public good is national defense. It is not a rival consumption product, since protecting one person from an invading army or missile attack does not reduce the amount of protection provided to others in the country. The nonexclusion principle also applies to national defense. It is not possible to protect only the people who pay for national defense while letting bombs or bullets hit those who do not pay. Instead, the government imposes broad-based taxes to pay for national defense and other public goods.

Adjusting for External Costs or Benefits

There are some private markets in which goods and services are produced, but too much or too little is produced. Whether too much or too little is produced depends on whether the problem is one of external costs or external benefits. In either case, the government can try to correct these market failures, to get the right amount of the good or service produced.

External costs occur when not all of the costs involved in the production or consumption of a product are paid by the producers and consumers of that product. Instead, some of the costs shift to others. One example is drunken driving. The consumption of too much alcohol can result in traffic accidents that hurt or kill people who are neither producers nor consumers of alcoholic products. Another example is pollution. If a factory dumps some of its wastes in a river, then people and businesses downstream will have to pay to clean up the water or they may become ill from using the water.

When people other than producers and consumers pay some of the costs of producing or consuming a product, those external costs have no effect on the product’s market price or production level. As a result, too much of the product is produced considering the overall social costs. To correct this situation, the government may tax or fine the producers or consumers of such products to force them to cover these external costs. If that can be done correctly, less of the product will be produced and consumed.

An external benefit occurs when people other than producers and consumers enjoy some of the benefits of the production and consumption of the product. One example of this situation is vaccinations against contagious diseases. The company that sells the vaccine and the individuals who receive the vaccine are better off, but so are other people who are less likely to be infected by those who have received the vaccine. Many people also argue that education provides external benefits to the nation as a whole, in the form of lower unemployment, poverty, and crime rates, and by providing more equality of opportunity to all families.

When people other than the producers and consumers receive some of the benefits of producing or consuming a product, those external benefits are not reflected in the market price and production cost of the product. Because producers do not receive higher sales or profits based on these external benefits, their production and price levels will be too low–based only on those who buy and consume their product. To correct this, the government may subsidize producers or consumers of these products and thus encourage more production.

Maintaining Competition

Competitive markets are efficient ways to allocate goods and services while maintaining freedom of choice for consumers, workers, and entrepreneurs. If markets are not competitive, however, much of that freedom and efficiency can be lost. One threat to competition in the market is a firm with monopoly power. Monopoly power occurs when one producer, or a small group of producers, controls a large part of the production of some product. If there are no competitors in the market, a monopoly can artificially drive up the price for its products, which means that consumers will pay more for these products and buy less of them. One of the most famous cases of monopoly power in U.S. history was the Standard Oil Company, owned by U.S. industrialist John D. Rockefeller. Rockefeller bought out most of his business rivals and by 1878 controlled 90 percent of the petroleum refineries in the United States.

Largely in reaction to the business practices of Standard Oil and other trusts or monopolistic firms, the United States passed laws limiting monopolies. Since 1890, when the Sherman Antitrust Act was passed, the federal government has attempted to prevent firms from acquiring monopoly power or from working together to set prices and limit competition in other ways. A number of later antitrust laws were passed to extend the government’s power to promote and maintain competition in the U.S. economy. Some states have passed their own versions of some of these laws.

The government does allow what economists call natural monopolies. However, the government then regulates those businesses to protect consumers from high prices and poor service, and often limits the profits these firms can earn. The classic examples of natural monopolies are local services provided by public utilities. Economies of scale make it inefficient to have even two companies distributing electricity, gas, water, or local telephone service to consumers. It would be very expensive to have even two sets of electric and telephone wires, and two sets of water, gas, and sewer pipes going to every house. That is why firms that provide these services are called natural monopolies.

There have been some famous antitrust cases in which large companies were broken up into smaller firms. One such example is the breakup of American Telephone and Telegraph (AT&T) in 1982, which led to the formation of a number of long-distance and regional telephone companies. Other examples include a ruling in 1911 by the Supreme Court of the United States, which broke the Standard Oil Trust into a number of smaller oil companies and ordered a similar breakup of the American Tobacco Company.

Some government policies intentionally reduce competition, at least for some period of time. For example, patents on new products and copyrights on books and movies give one producer the exclusive right to sell or license the distribution of a product for 17 or more years. These exclusive rights provide the incentive for firms and individuals to spend the time and money required to develop new products. They know that no one else will copy and sell their product when it is introduced into the marketplace, so it pays to devote more resources to developing these new products.