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The Role of Government in the Economy: Public Goods and Market Failures

This document explores the crucial role of government in the economy, focusing on public goods and market failures. Public goods, such as street lights and national defense, are provided by the government, funded through taxes, and are characterized by non-excludability and non-rivalry. It also discusses market failures, highlighting positive externalities like free rider benefits from fireworks and negative externalities such as pollution. Moreover, it outlines the government's role in providing safety nets, exemplified by programs like Medicare, Medicaid, and unemployment insurance.

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The Role of Government in the Economy: Public Goods and Market Failures

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  1. 3.3 notes The role of gov’t in the economy

  2. Public Goods • Provided by gov’t, used by everyone • Funded by taxes • Examples – street lights, national defense • 2 characteristics: 1. can’t exclude anyone and 2. one person’s use doesn’t reduce usefulness to someone else

  3. Market Failure • Can happen when people benefit or are hurt by something they are not part of • They are called positive externalities or negative externalities • Example: free rider that watches fireworks (positive) or pollution in air, water (negative)

  4. Cont’d • We want to SPREAD positive externalities, sometimes through subsidies • Example: flu shots for free • We want to SLOW DOWN or STOP negative externalities • Example: taxing companies that pollute

  5. Gov’t also… • Provides safety nets for people that may to too old or sick • Examples: Medicare, Medicaid, Social Security, unemployment insurance • http://www.cnn.com/2014/02/06/politics/unemployment-insurance/index.html?hpt=po_c2

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