Chapter 4 includes a description of the private sector in the U.S. economy as well as a discussion of the role of government.  Our classroom time will focus primarily on the latter.  For test purposes, you are not responsible for any of the material from page 75 through the end of the chapter.

The Private Sector:  Read the entire section.  It is informative, but does not require much explanation.  Pay particular attention to the section on the Distribution of Income and Forms of Business (Figures 4.2 and 4.5)

1.    Provide the Legal Structure  

        A.    establishes the legal status of various business enterprises       

        B.    ensures the rights of private ownership of property

        C.    sets the "rules of the game" for making and enforcing contracts.

2.    Maintain Competition: regulates monopolies and enforces antitrust laws         

3.   Redistribute Income

        A.    transfer payment programs

        B.    progressive tax system

4.    Promote Economic Stability:   Deals with the problems of unemployment and inflation

5.    Reallocate Resources:  

        Spillovers (externalities)

        Spillover costs exist when part of the cost of producing or using a good "spills over" onto someone other then the producer or user, without compensation.  In such cases, the market economy would overallocate resources to that good.  We rely on government to internalize these external or spillover costs, thus reallocating resources to provide greater allocative efficiency.

        Spillover benefits exist when part of the benefit from the production or consumption of a good goes to someone other than the actual producer or consumer, without any payment.  In such cases, the market economy would underallocate resources to that good.  We depend on government to correct this underallocation by providing subsidies to producers or consumers, or simply producing the good or service as a government good. i.e., public education, public transportation. 

        Public goods have the same effect on resource allocation as goods with substantial spillover benefits, meaning that the market economy would underallocate resources to goods classified as public goods.

        Private goods have two important characteristics - rivalry and excludability.  Private goods are "divisible" and therefore, if one person consumes a unit of good X, that unit is not available to any other person. Also, private goods conform to the exclusion principle (once produced the good can be rationed).

        Public goods have the opposite characteristics - nonrivalry and non-excludability.  They are not divisible and, once produced, no one can be excluded from their use (the good cannot be rationed).

        Quasi-public goods are not really public goods, but rather are goods which have such large spillover benefits that we rely on government to produce them.  Examples are public education, public libraries, public parks, etc.