Government Interactions with the Economy

Topics: Tax, Externality, Public good Pages: 3 (932 words) Published: September 28, 2006
Government Interactions with the Economy

1)Negative Externalities- external costs lead to an over allocation of resources to the specific economic activity. There are 2 possible ways of correcting these overspills: •Taxation- the government can demand an effluent fee, which is a charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution. •Regulation- the government could specify a maximum allowable rate of pollution. This would require the installation of pollution abatement equipment in its rate of output, or some combination of the 2. Finally, the government would need to determine the appropriate level of pollution as well as measuring the pollutants emitted to enforce such a regulation.

2)Positive Externalities- external benefits result in an under allocation of resources to the specific activity. There are 3 possible government corrections: •Government Financing & Production- the government may choose to finance the desired additional production facilities so the right amount of the good will is produced. •Subsidies- a negative tax made payable to a business or to a consumer when the business produces or the consumer buys a good or service. Reduction of the net price to a consumer causes larger quantities to be demanded. •Regulation- the government can require by law that the individuals in the society undertake a certain action.

3)Providing a Legal System- all relationships among consumers and businesses are governed by the legal rules of the game. The government is in charge of settling disputes within the economy, and often imposes penalties for violations of legal rules. •Property Rights- the rights of an owner to use and to exchange property. Much of our legal system is involved with defining and protecting these rights.

4)Promoting Competition- one of the roles of government is to serve as the protector of a competitive economic system. •Antitrust Legislation- laws that...
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