Roles of Government in a mixed

economy
Government in the Circular Flow Model
 Supplies goods and
services to business
firms and
households
 Demands resources
in resource markets
 Taxes household
income and business
revenues
 Transfers income to
households
7 Roles of Government in a mixed
economy

1. Establishing and
enforcing rules
of exchange
a.Property rights
b.Contract law
7 Roles of Government in a mixed
economy

2. Promoting competition/prevent
anticompetitive practices
7 Roles of Government in a mixed
economy

3. Regulating natural monopolies

 One firm that can serve the entire market
at a lower per- unit cost than can two or
more firms
7 Roles of Government in a mixed
economy

4. Provide public goods

Technical characteristics of public goods:
 Non rival consumption
 High cost of excluding those who do not pay
Public v. private goods

high
Cost of exclusion→

Pure public

Private

0
high

Degree of rivalness→
7 Roles of Government in a mixed
economy
5. Dealing with
externalities
Externality is a cost or
benefit that falls on
third parties and is
therefore ignored by the
two parties to the
market transaction
a. Negative Visibility Impairment from Air Pollution
externality – cost Shenandoah National Park - Virginia
imposed on others
b. Positive externality
– benefit gained by
others
 7 Roles of Government in a mixed
economy

6. Redistribute income

President F.D. Roosevelt Signing the Social Security Act of 1935

7 Roles of Government in a mixed
economy

7. Promote macroeconomic goals of:

a. Full employment
b. Price stability
c. Economic growth

Monetary policy pursued

by the Federal Reserve
Fiscal policy pursued by
the Federal government