Providing a Stable Legal Environment

LESSON 8

EðRðE phrases (to be written out from the English text) for translation by ear.

Revise the topical vocabulary concentrating on the underlined parts of the text.

Make sure you will be able to translate these from Russian into English.

GOVERNMENT IN A MARKET ECONOMY

Government directly provides some goods, and indirectlу channels resources into the production and consumption of other goodsvia taxes and reg­ulations. As we approach the twenty-first century, our society is more regulated and taxed than when economic policiesfollowed a more laissez-faire philosophy: federal, state, and local governments now directly allocate roughly one-fifth of national production; another 15%is redistributed through transfer payments, with two-thirds of all transfers being made by the federal government. Transfer payments include welfare outlays, loans to farm­ers and students, and similar expenditures. Figure 11 illustrates some facets of the size and re­cent growth of total government activity.

Many people see government action as nec­essary whenever markets apparently fail to re­spond to our desires for equity, efficiency, full employment, stable prices, and prosperous growth. Widely accepted economic goals for government in a market economy are:

1. to provide a stable legal environment for business activity

2. to promote and maintain competitive markets

3. to allocate resources to meet public wants efficiently

4. to facilitate equity through redistributions of income

5. to ensure full employment, a stable price level, economic security, and a growing standard of living

Although macroeconomic and microeconomic policies are unavoidably intertwined, goals 1 through 4tend to be microeconomic concerns, while goal 5 is the focus of macroeconomic policymaking.

Providing a Stable Legal Environment

A reasonably certain legal environment helps prevent chaos. Could any system operate effi­ciently if ownership rights or the rules of busi­ness were uncertain? Property rights or contracts, if they existed, would be enforce d only through brute force or individual persuasion. Primitive trading could occur, but complex fi­nancial transactions —especially those involving time—would be impossible.

In a market economy, government estab­lishes rules aboutlegal relationships between parties, sets standardsfor money and weights and measures, sometimes insures bank deposits, and engages in other activitiesintended topro­mote the public welfare.

Promoting Competition

Competition allows us to enjoy the benefits of ef­ficient markets. Profits signal that consumers want more of certain goods; losses signal that too much is being offered. New technologies that cre­ate better and cheaper products force older firms to adapt or perish. Thus, hand-cranked autos don't clog our highways and motor-driven cal­culators don't clutter our desks.

Monopoly, which occurs when a single firmdominates a market, lies at the opposite end of the spectrum ofmarket structures from com­petition. Market power (also known as monopoly power) exists whenever individual firmssignif­icantly influence the supply and price of a good and may be present even if several firms share a market. In contrast, competitive buyers and sellers are each so small relative to the entire market that, alone, none can noticeably affect total output or prices. Firms with market power boost profits byrestricting output and setting higher prices. This is inefficient because equi­librium monopoly pricesexceed the opportu­nity cost to society of additional production.

The basic approach to controlling monopoly power in the United States has been through an­titrust laws and regulation. Antitrust laws attempt to curb unfair business practices and prevent huge firms from absorbing all their competitors. Where competition is impractical (e.g., electricity and natural gas companies), regulation is used to limit the abuse of monopoly power.

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