Back To CourseBusiness Law: Help and Review
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Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.
Can you imagine if there were no laws to enforce business contracts, no prisons, no welfare programs to help low-income people with healthcare or food, and no stability in the prices you pay for everyday goods and services? The economy would look and feel very different, that's for sure!
In order to maintain an economy and society that functions more smoothly, government has stepped in to help out where needed. There are many things the government does to ensure the economy runs smoothly. For the purpose of this lesson, we will focus on six economic functions of government. Let's explore them now and provide a few examples of each.
First, the government regulates legal and social framework. Can you imagine if one business partner stole from another partner and there was nothing that could legally be done about it? Luckily, the government helps ensure that legal contracts for businesses are enforceable through a court system. This helps keep all people accountable when doing business together. This function also ensures that when you purchase a home or other asset that you have certain rights and protections. Would you purchase a home if you knew you had no legal right to the property? Luckily, that is not the case!
Second, the government helps maintain competition. Can you imagine if you only had one airline to choose from when you flew? How about only one cell phone carrier or one company to purchase cars from? Part of the government's role is to enforce anti-trust laws, which keep monopolies from happening. This ensures many businesses are able to compete and offer products and services to consumers. As a result, you experience better quality products and lower prices.
Third, the government is there for correcting externalities. Externalities are effects of business decisions that can affect people or parties that had no say in a matter or no control over decisions in the first place. An example is factory pollution. A factory may produce a great product that is needed in the economy, such as pet food, vehicles, or aspirin. In making that product, the factory may create a lot of pollution or waste that can cause health concerns for nearby areas. In this case, the government can step in and can tax or set regulations to help ensure pollution and waste are kept at acceptable levels.
Fourth, the government provides public goods and services. One of the government's duties is to ensure we all feel safe through an adequate national defense program. They also provide national parks, like Yellowstone and Yosemite, that we can enjoy. Things that many of us rely on, such as prisons, fire services, public schools, transportation, and delivering mail, are all examples of this. These are all things that the public and, by extension, the government have deemed too important to be left to the devices of private businesses and organizations or to the whims of making a profit.
Fifth, the government is responsible for the redistribution of income. In a capitalist and free market economy, there are often inequalities or gaps in how income is distributed among social classes. The government uses a progressive tax system to help distribute income in a more socially just manner so that all individuals have opportunities to improve their standard of living. The thought is that society is better off as a whole if all citizens can improve their financial situation, and not just the ultra wealthy. Besides the income tax system, the government provides services such as housing assistance, healthcare (Medicaid and social security services), unemployment programs, and food stamp programs to help those in need get the necessary assistance.
Sixth, and finally, the government is there to promote economic stability. Through the Federal Reserve Bank, tax policies, and spending programs, the government is able to help control and manipulate the unemployment and inflation in the economy to what it deems are appropriate levels.
Why is this important? Additional government projects and lower taxes on business owners can result in more jobs for the economy. This means it is easier for you to find a job! If interest rates or the national money supply were left unchecked, you might find that you could pay 20% annual interest on a car loan.
It is also very possible that a pair of basic running shoes would cost $500 or a gallon of milk might set you back $20. Our money wouldn't go very far in those cases. The Federal Reserve Bank helps ensure that this doesn't happen. In countries where this is not a focus, it is not uncommon to hear of periods of history where prices of everyday goods increased by ten or twenty-fold in less than a month or two.
There are several different ways that governments can support and ensure that an economy functions smoothly. In many capitalist or free market economies, the government usually provides support in four to six broad areas. In the United States, we can divide them into six categories. They are regulation of legal and social frameworks (courts, legal contracts, and property rights), maintaining competition (anti-trust laws and no monopolies), correcting externalities (pollution), providing public services and goods (national parks, defense, and post office), re-distributing income (income tax and welfare programs for needy), and promoting economic stability (controlling inflation and unemployment).
While many business owners would prefer to have the government stay out of their business practices, there are several reasons that the government would want to get involved. From environmental protections to economic stability, the government can help guide an economy and protect those who could be victimized by unfair business practices.
After reviewing this lesson, you should be able to identify and explain the six different ways the United States government directly affects the economy.
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Back To CourseBusiness Law: Help and Review
27 chapters | 345 lessons
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