How should the U.S. government carry out its economic roles?
Securing property rights is an important role for government in our economy, but it is not the only role. The federal government is involved in many aspects of the economy by setting and enforcing standards for dozens of industries. Through this regulation, the government seeks to protect the interests of all participants in the economy. One way government does this is by ensuring that markets are competitive.
Like property rights, competition is essential if markets are going to work the way they are supposed to work. The pressures of competition force producers to use resources efficiently, to develop new or better products, and to keep products and services affordable. Because competition is vital to the economy, the government acts to maintain competition when markets fail to do so.
The government‘s main guardian of competition is the Justice Department. This cabinet-level department, through its Antitrust Division, enforces the antitrust laws that Congress has enacted over the years. It often works closely with the Federal Trade Commission. The FTC is a regulatory agency — a unit of government that makes and enforces standards for an industry or area of economic activity.
As modern-day trustbusters, the justice Department and the FTC prohibit practices that restrict competition. When they uncover such practices, they take the offending companies to court. Successful prosecution can lead to fines and jail sentences for the guilty parties. These illegal practices include the following:
Price Fixing. The illegal practice of price fixing occurs when competitors agree on a price for a good or service. Price fixing can take many forms, from adopting a formula for computing prices to setting a minimum fee for services.
Bid rigging. Purchasers – including federal, state, and local governments – often acquire goods and services by seeking bids from competing firms. Bid rigging occurs when competitors agree in advance who will submit the winning bid. That bid, which is the lowest bid, will still be higher than it would have been in a competitive market. Firms that engage in bid rigging may take turns being the low bidder on a series of contracts.
Market division. The tactic known as market division occurs when competitors agree to divide a market among themselves. In one type of scheme, each competitor sells to only certain customers. In another, each competitor sells in only certain geographic areas.
The Justice Department and the FTC also monitor mergers, in which two separately owned firms combine into one firm. A merger is illegal if it will substantially lessen competition or tend to create a monopoly.
The government does allow some natural monopolies to exist. A natural monopoly arises when a single firm can supply a product more efficiently than multiple competing firms can. The American Telephone and Telegraph Company, better known as AT&T, was once a natural monopoly. In the mid-1900s, it controlled the vast majority of the nation‘s telephone services.
In the 1970s. however. the Justice Department took action to break up AT&T‘s monopoly. After a lengthy lawsuit. the company agreed to spin off seven separate regional phone companies. which became known as Baby Bells. AT&T continued to provide long-distance telephone services. Figure 11.3A shows how the Baby Bells later merged into three much larger telecommunication companies.
Caveat emptor. This long-standing rule of the marketplace is Latin for “Let the buyer beware.” It serves as a warning to buyers that they purchase goods and services at their own risk. But in today‘s complex market, buyers may not have all the information they need to make sound judgments about products. Instead. they have come to rely on regulatory agencies to provide such information. Consumers, savers, and investors also look to such agencies to ensure that products are safe and dependable.
Protecting consumers. Regulation to protect consumers began in the early 1900s. One of the first targets of government regulators was the meatpacking industry. Upton Sinclair. in his novel The Jungle. described what went on in meatpacking plants.
Thanks in part to Sinclair’s stomach-turning prose, Congress passed both the Meat Inspection Act and the Pure Food and Drug Act in 1906. This legislation paved the way for a new regulatory agency, now known as the Food and Drug Administration. The FDA oversees the testing and approval of drugs before they go on the market.
Another wave of consumer regulation began in 1965, triggered by Ralph Nader’s book Unsafe at Any Speed. Nader claimed that automobiles were unsafe and that the auto industry resisted making cars safer because of the added cost. The next year, Congress passed legislation requiring automakers to install seat belts in all cars. This law led to the creation of an agency to set safety standards for automobiles, the National Highway Traffic Safety Administration.
In 1972, Congress created the Consumer Product Safety Commission to protect Americans against undue risks associated with consumer products. This agency now sets standards for more than 15,000 products, from toys to lawn mowers.
During President Obama‘s first term, a new agency was created to protect consumers in markets for financial products. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau. This agency‘s basic function is to establish and enforce rules that allow consumers to make well-informed decisions regarding financial products, including mortgages or credit cards.
Protecting savers and investors. Of the many banking-related agencies, the Federal Deposit 1nsurance Corporation may have the most direct role in protecting savers. The FDIC insures nearly all bank deposits for up to $100,000 per depositor.
The Securities and Exchange Commission protects investors by making sure they have the information they need to judge whether to buy, sell, or hold a particular security. The SEC establishes and enforces rules to ensure that companies provide that information in a timely and accurate manner.
Such regulatory agencies allow Americans to feel confident when transacting business with total strangers. As the president of a Federal Reserve Bank once observed,
