Reading Essentials and Study Guide

Transcription

1 Lesson 3 The Role of Government ESSENTIAL QUESTION How does the government attempt to correct market failures? Reading HELPDESK Academic Vocabulary restrained limited the activity or growth of intervention involvement in a situation to alter the outcome Content Vocabulary trusts illegal combination of corporations or companies organized to suppress competition price discrimination practice of charging customers different prices for the same product cease and desist order ruling requiring a company to stop an unfair business practice that reduces or limits competition economies of scale increasingly efficient use of personnel, plant, and equipment as a firm becomes larger public disclosure requirement forcing a business to reveal information about its products or its operations to the public mortgage legal document that pledges ownership of a home to a lender as security for repayment of borrowed money foreclosure process in which a lender reclaims the property due to a lack of payment by the borrower TAKING NOTES: Key Ideas and Details Fill out the graphic organizer to help you understand government s role in helping to ensure competition and prevent business failure in the economy. How government ensures competition and prevents business failure in the U.S. economy 1

2 Ensuring Competition Guiding Question Why are some government regulations beneficial for consumers? Government can help maintain competitive markets in several ways. One is by attacking major market structures, such as monopolies, to try to break them up. A second is to expand laws against monopolies and other restraints on trade to prevent them from forming. A third is to leave the monopolies in place, but to regulate their activities rather than stop them. Breaking Up Monopolies In the late 1800s, competition was threatened by the growth of monopolies and trusts. A trust is a combination of firms designed to restrict competition or control prices in an industry. The most famous monopoly at the time was Standard Oil Company, owned by John D. Rockefeller. It controlled 90 percent of the domestic oil industry. Because it was so big and powerful, it could set any price it wanted for its products. The government tried to restore competition in 1890 by passing the Sherman Antitrust Act. This act s goal was to protect trade and commerce against unlawful restraint and monopoly. The Sherman Act, described in Figure 7.4, was the nation s first major law against monopolies and other restraints on competition. The government sued Standard Oil under the Sherman Act. The case reached the Supreme Court in The court decided against Standard Oil, and it was forced to break up into 34 separate companies. Preventing Monopolies from Forming The Sherman Act laid down a broad base to preserve competition. However, the act was not specific enough to stop other practices that restrained competition. As a result, Congress passed the Clayton Antitrust Act in This gave the government more power over monopolies. It outlawed price discrimination. This is the practice of selling the same product to different consumers at different prices if it causes a great loss of competition. The Federal Trade Commission Act was passed in the same year to enforce the Clayton Antitrust Act. The act set up the Federal Trade Commission (FTC) and gave it the power to issue cease and desist orders. A ceaseand desist order forces a company to stop an unfair business practice. This might include price fixing, which reduces or limits competition. In 1936, Congress passed the Robinson-Patman Act. This was an effort to strengthen the Clayton Act, particularly the parts that dealt with price discrimination. Under this act, companies could no longer offer special discounts to some customers, while denying them to others. Regulating Existing Monopolies Not all monopolies are bad. For that reason, not all should be broken up. Sometimes a firm can benefit from economies of scale. This is the economic advantage a firm can get from growth because as a firm gets larger, the average cost of production falls. If a natural monopoly can benefit from this, it makes sense for the government to let the firm expand. It can still regulate the firm s activities so that it cannot take unfair advantage of consumers. Local and state governments regulate many monopolies. These include cable television companies, water, and utilities. If a utility, such as an electricity or water company, wants to raise rates, it must argue its case before a public utility commission or other government agency. 2

3 Reading Progress Check Describing Why are some government regulations beneficial for consumers? Competition, Consumer Protection, and Regulation Guiding Question: How does the government promote economic efficiency? The government also has other, indirect ways to deal with restraints on trade. It can promote public disclosure to consumer groups. It can introduce new agencies to protect existing consumer activities. Promoting Transparency Efficient and competitive markets need good information. (Transparency means that information and actions are not hidden and can be easily reviewed.) Public disclosure, the requirement that businesses reveal certain information, is a good way to do this. For example, every time you buy packaged food you will find a list of its ingredients. If you want information about a company, you can check with the Securities and Exchange Commission (SEC). The SEC requires all publicly traded corporations to share financial and operating information regularly with their shareholders and the SEC. The data is easily found in a free database on the Internet. Disclosure requirements also exist for consumer loans. If you get a credit card or borrow money to buy a car, the lender must explain in writing the method for computing the monthly interest. The lender will tell you the length of the loan, the amount of the payments, and other lending terms. This is not an act of kindness on the lender s part. Federal law requires these disclosures. Finally, truth-inadvertising laws are enforced by the Federal Trade Commission (FTC). These laws keep sellers from making false claims about their products. Exploring the Essential Question Limits to Transparency? Since regulatory agencies were first formed, businesses have argued against what they considered excessive transparency. Should restaurant menus include information about their food s fat content and calories? Should food packagers disclose exactly how natural the natural flavorings are in their products? Should foods whose genetic properties have been altered by scientists be labeled as genetically modified food? What do you think? Should the requirements for transparency be limited? If so, in what cases? Do you think greater transparency is linked to market 3

4 failure? What types of transparency do you want or not want? Write a short essay explaining your point of view. Consumer Financial Protection Bureau One major cause of the Great Recession of was the millions of low-quality home mortgages that could not be repaid. A mortgage is a legal document. It pledges ownership of a home to a lender as security for the borrowed money. When consumers stopped making their mortgage payments, they lost their homes to foreclosure. Foreclosure is when a lender reclaims a home because the borrower has failed to make his or her payments. Millions of people lost their homes. Lenders lost billions of dollars. Both helped pull the economy down. In hopes of preventing another crisis like this, Congress established the Consumer Financial Protection Bureau (CFPB) in Its purpose is to provide oversight and guidance in the lending industry. For example, one early action was the development of an Ability-to-Repay rule. This rule was designed to assure both borrowers and lenders of reliable (stable) mortgage repayment conditions. Other actions included prescribing (setting) rules for debt collection and issuing guidance to debt collectors. Also, almost all government documents, studies, and reports are on the Internet. This adds a great deal of transparency. Federal Regulatory Agencies in Our Lives There are literally hundreds of federal agencies that affect almost everything we do. The short list in Figure 7.5 touches on some of the major ones regulatory agencies. But these are not all. Most of us are aware of reports from the National Weather Service. We might read about auto recalls issued by the National Highway Traffic Safety Administration (NHTSA). You have probably heard about high-profile product recalls of cribs or car seats that can are unsafe. You also may have heard about products that have been recalled by the Food and Drug Administration (FDA) because they were making people ill. However, some federal agencies and protections are unknown to the average consumer. Did you know that banks are checked by the Federal Deposit Insurance Corporation (FDIC) to keep them safer? Did you know that the Federal Aviation Administration (FAA) runs airport inspections and pilot training? Did you know that the FTC stopped a merger by Microsoft and Yahoo because the newcombined company would have had an unfair market advantage? Zoning and Other Local Ordinances Not all regulations in our lives are at the federal level. Regulations at the local level affect us, too. For example, zoning is a way of controlling land use. It is in effect almost everywhere. In 1926, the U.S. Supreme Court made it legal to use zoning as a way to promote and protect the health, safety, and welfare of the people in a community. Zoning divides a community into small parcels. In each one, the location, construction, and amount of residential, commercial, and industrial activities are regulated. 4

5 For example, residential zoning laws are meant to stabilize and maintain neighborhoods. This is done by specifying things such as the minimum size of home lots, as well as the maximum height and size of structures. An area zoned for commercial use might specify the type and size of retail stores and the parking needed. An area zoned for industrial use might allow for medium to heavy manufacturing and rail access. Despite positive goals, communities evolve over time. Zoning laws may or may not keep up with the changes. Take, for example, a city that had an active residential downtown 50 years ago. Over time many of the people may have moved to the suburbs or elsewhere, leaving empty homes, storefronts, and hotels. New zoning changes might help these areas, but they may not be in place or may not be possible. Some people in those areas may be afraid of even more change. Other people argue that zoning laws restrict their freedom to make choices. They oppose all zoning laws for that reason. Most of these topics are too broad to examine in detail here. However, local government regulations affect our lives almost as much as federal regulations do. Reading Progress Check Describing How does increasing transparency help the U.S. economy? Modified Free Enterprise Guiding Question Why is the U.S. economy considered a free enterprise economy? The U.S. economy has changed a great deal over the years. One outcome of this change is the rise of the modified free enterprise economy. In short, almost everything we do and everything we buy is affected by some of the hundreds of federal agencies. Laws, such as zoning laws, that affect people s property rights and their economic freedom are also responsible for the rise of our modified free enterprise system. In the late 1800s, the freedom to follow self-interests led some people to seek economic gain at the expense of others. Under the label of competition, many larger firms took advantage of smaller ones. In some industries, less competitive market structures, such as monopoly, weakened competition. The economy became less efficient. Because of these developments, Congress passed laws to prevent evil monopolies and to protect workers rights. It also passed food and drug laws to protect people from false claims and harmful products. Even public utilities faced major regulation to stop unfair pricing. Altogether, these actions have resulted in the modification of free enterprise. 5

6 More recently, focus has shifted to economic efficiency and the role of the government in it. Markets have become increasingly important. Also, we know that markets can fail in several different ways. When this happens, government now has the power to take steps to fix the problems. Along with some involvement to keep markets competitive, the government can make the economy more efficient by supplying public goods. It can also promote transparency. People will continue to argue the proper role of government. But it turns out that markets alone cannot meet all our wants and needs. Government s role has slowly grown from concern over consumer protection to the promotion of economic competition and efficiency. Due to this government intervention, we have a modified free enterprise economy. It is a system based on markets with varying levels of government regulation. Reading Progress Check Summarizing Why do we use the term modified to describe the American free enterprise economy? 6