A. Provide a proper legal atmosphere (rules) for capitalism
B. Insure competition
1. Antitrust laws protect against abuse of monopoly power.
2. Natural (justifiable) monopolies such as AT&T were allowed because
duplicating high-cost fixed investments is illogical.
3. The emphasis on free markets discussed in chapter 3 has resulted in some natural
monopolies being broken into smaller companies which had to compete against
new companies touting new technologies.
C. Provide for an equitable distribution of income
1. Transfer payments where a government moves general revenue to a
specific group, i.e., Aid to Families with Dependent Children, students...
2. Market Intervention (affecting supply and demand)
a. Minimum wage decreases supply raising price and lowering quantity.
b. Excise taxes on alcohol, cigarettes, jewelry, etc., deceases supply.
c. Farm price supports, aid to small business and education increases supply.
D. Adjust for market failures
1. Adjust for spillovers (externalities)
a. Effects of a market system often spillover onto non-participants who are
external to the market transaction.
b. Both costs and benefits result.
1. Pollution hurts (costs) society so government tries to affect the supply of,
and demand for, pollution causing products such as automobiles.
For automobiles, they lower supply by requiring catalytic converters and
they lower demand with high excise taxes.
2. An educated workforce benefits society so government increases demand
(aid to students) and supply (aid to colleges).
3. Currently, our addiction to gasoline is high, as has global warming
E. Affecting total economic activity