LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? FOCUS:UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION,NEW YORK,NY 45 LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? INTRODUCTION CONCEPTS In order to ensure and support economic • Competition freedom as well as political freedom, the • Economic stabilization founders of the United States envisioned a limited role for the government in economic • Externality affairs. In a market economy such as the one • Income redistribution established by the U. S. Constitution, most economic decisions are made by individual • Public goods and services buyers and sellers, not by the government. • Social and legal framework Still, the U.S. government’s role in the OBJECTIVES economy is not trivial. It includes, most econ- omists believe, responsibility for six major Students will be able to: functions. The government (1) provides the legal and social framework within which the 1. Classify government economic activities economy operates, (2) maintains competition according to the six economic functions of in the marketplace, (3) provides public goods government. and services, (4) redistributes income, (5) cor- 2. Analyze governmental economic actions rects for externalities, and (6) takes certain within the liberal/conservative framework. actions to stabilize the economy. CONTENT STANDARDS Citizens, interest groups, and political Economics (CEE Standards) leaders disagree about the proper scope of government activities within each of these • There is an economic role for government functions. Over time, as society and the econ- in a market economy whenever the bene- omy have changed, government activities in fits of a government policy outweigh its each area have generally expanded. costs. Governments often provide for Moreover, around the world, other societies national defense, address environmental with market economies have generally favored concerns, define and protect property a larger economic role for government, some- rights, and attempt to make markets more times endorsing actions beyond the six func- competitive. Most government policies also tions addressed in this lesson. redistribute income. (Standard 16) • Federal government budgetary policy and the Federal Reserve System’s monetary LESSON DESCRIPTION policy influence the overall levels of The teacher introduces six economic func- employment, output, and prices. (Standard tions of government in a brief lecture. In a 20) guided practice activity, the students classify Civics and Government (NSCG newspaper headlines according to the six Standards, Grades 9-12) functions. A brief reading introduces “liberal” and “conservative” views of the proper scope of • The relationship of limited government to government economic activity. The lesson con- political and economic freedom. (Standard cludes with students working in groups to I.B.4) develop liberal and conservative arguments • Character of American political conflict. about one of the newspaper headlines. (Standard II.C.2) 46 FOCUS:UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION,NEW YORK,NY WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? LESSON 4 • Major responsibilities of the national to such a restriction of their freedom of government in domestic and foreign policy. choice. Finding one’s own yellow car in a (Standard III.B.2) parking lot full of yellow cars might be difficult. The yellow-only rule might TIME REQUIRED encourage people who don’t like yellow to 90 minutes purchase cars manufactured outside the United States, or to repaint their yellow MATERIALS cars illegally.) • A transparency of Visual 4.1 4. Review the examples discussed thus far, real and hypothetical: from governmental • A copy for each student of Activities 4.1, provisions for national defense to govern- 4.2, and 4.3 ment-sponsored vacations for everybody. Explain that most Americans (not all) PROCEDURE agree that government should do some of 1. Tell the students that the purpose of this these things and should not do others, for lesson is to examine the economic func- various reasons. But what reasons? What tions of government. Ask the class to general ideas might Americans look to for suggest some economic activities of local, guidance in thinking about the govern- state, and national governments. List ment’s proper, limited role in the nation’s several responses on the board. (Possible economy? Economists who study this ques- responses include providing for national tion have a six-part answer. They general- defense, providing low-cost meals at school, ly contend (again, not all of them) that paying Social Security benefits, building government has six legitimate functions to and repairing roads, etc.) perform within the U.S. economy. The 2. Point out that government could do all class now will turn to a consideration of sorts of things. For example, it could pro- these six functions. vide everyone with an MP3 player, or pro- 5. Display Visual 4.1 and distribute copies of vide everyone with an annual vacation at it (Visual 4.1 also serves as Activity 4.1). a theme park. Ask: What problems might Explain each of the six economic functions arise if the government expanded its role of government. Solicit examples from the along these lines? (These new programs students for each function, and ask what would cost a lot of money. To pay for them, would happen if government did not per- people would have to pay higher taxes. form this function. Have the students Higher taxes would create economic ineffi- write examples and notes on their copies ciencies. And people not interested in MP3 of the activity. players or theme parks would object that their tax money was being wasted.) • Maintain the Legal and Social Framework: 3. Pose another hypothetical example, this time concerning government regulation: Define and enforce property rights. Government imposes lots of rules in the (Government passes laws and estab- economy—workplace safety regulations, lishes a court system. No one could sell for example. But some things still go property, invest, or have confidence in unregulated. Why not regulate in every contracts if this legal system did not problem area? What would happen if the exist.) government decided that all new cars pro- Establish a monetary system. duced in the United States must be yellow, (The federal government controls the since yellow cars are easier for other driv- amount of money circulating in the ers to see? What might be problematic economy; it also regulates banks and about that? (Many Americans would object other financial institutions. People FOCUS:UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION,NEW YORK,NY 47 LESSON 4 WHAT ARE THE ECONOMIC FUNCTIONS OF GOVERNMENT? would have to barter for the goods and (Positive externalities exist when some of services they wanted if this monetary the benefits associated with production or system did not exist, and they might consumption “spill over” to third parties— stay away from banks if banks were not people other than the producer or consumer regulated.) of the product. One example is public edu- cation. Government subsidizes education • Maintain Competition: because its benefits flow to the students and to society in general. We would have Create and enforce antitrust laws, and fewer benefits linked to education without regulate natural monopolies. subsidization.) (The government sued Microsoft for monop- oly practices; the government regulates the • Stabilize the Economy: prices charged by companies that distrib- ute natural gas to homes. Companies Reduce unemployment and inflation, and might charge higher prices and provide promote economic growth. poor products if government policies did (The federal government attempts to stabi- not promote competition.) lize the economy through applications of fiscal policy [by raising or lowering taxes, • Provide Public Goods and Services: or by government spending] and monetary policy [by controlling the money supply or Public goods and services are those that by changing interest rates]. Without these markets will not provide in sufficient actions, the economy might take much quantities. longer than it ordinarily does to recover (Examples include national defense, road- from recessions.) ways, post offices and mail carriers, light- houses, public defenders, public health • Redistribute Income: clinics, public schools, and other important goods and services. Some important goods Redistribute income from people who have and services would be unavailable if the higher incomes to those with lower government did not provide them.) incomes. (Redistribution usually involves higher tax • Correct for Externalities: rates for people with higher incomes. The tax revenue raised in this way helps to pay Reduce negative externalities. for various welfare programs, the Medicaid (Negative externalities exist when some of program, legal defense clinics, etc. Some the costs associated with production or people could not afford basic necessities consumption “spill over” to third parties— without government redistribution pro- people other than the producer or consumer grams.) of the product. One example is pollution of lakes and rivers caused, for example, by 6. Distribute Activity 4.2. Explain that the 12 industrial waste. The pollution affects newspaper headlines are fictitious but real- everybody who uses the lakes and rivers, istic, each one referring to a government including those who had no part in pro-