Chapter 3Chapter 3

American Free Enterprise:American Free Enterprise:

Private or corporate Private or corporate ownership of capital goodsownership of capital goods

Features of American Free Features of American Free EnterpriseEnterprise

Economic FreedomEconomic Freedom CompetitionCompetition Private PropertyPrivate Property Self-InterestSelf-Interest ContractsContracts Voluntary ExchangeVoluntary Exchange Profit MotiveProfit Motive

Economic FreedomEconomic Freedom

Individuals – work Individuals – work wherever they wherever they choosechoose

Businesses – hire Businesses – hire whomever they whomever they choosechoose

Government – Government – minimal minimal interventionintervention

CompetitionCompetition

Producers have an incentive to ‘beat Producers have an incentive to ‘beat the competition’the competition’

Consumers benefit as a resultConsumers benefit as a result

Think of one way that each fast food Think of one way that each fast food provider has tried to beat the provider has tried to beat the

competition?competition?

Why are the Buffalo almost Why are the Buffalo almost extinct and Cows are not?extinct and Cows are not?

Private PropertyPrivate Property

Individuals and Individuals and businesses can buy businesses can buy and sell property and sell property and limit its use.and limit its use.

What is significant about this What is significant about this picture? What does it tell picture? What does it tell

you about private property?you about private property?

Self-InterestSelf-Interest

Consumers and businesses operate Consumers and businesses operate to their own benefit. Their decisions to their own benefit. Their decisions do not have to please the do not have to please the government, other consumers, or government, other consumers, or other producers.other producers.

ContractsContracts

Individuals and Individuals and Businesses form Businesses form written agreements written agreements that are legally that are legally binding.binding.

Voluntary ExchangeVoluntary Exchange

Both consumers Both consumers and producers gain and producers gain from voluntary from voluntary exchange of exchange of goods/services.goods/services.

Profit MotiveProfit Motive

Profit is a powerful Profit is a powerful incentive that incentive that leads leads entrepreneurs to entrepreneurs to accept the risk of accept the risk of failure.failure.

““Taxes are what we pay for civilized society”Taxes are what we pay for civilized society” Oliver Wendell Holmes Jr., 1904 Oliver Wendell Holmes Jr., 1904

Explain what this quote Explain what this quote meansmeans

Government Role in Free Enterprise

Public Goods and Services Paid for by taxes

Correct for Market Failures

Public Goods and Services

Quiz Time!! Were you listening?

Private Goods …

Goods and services that can be purchased and consumed by one individual at a time

Examples….

Public Goods and ServicesPublic Goods and Services

Public goods:Public goods: (3 part test) (3 part test)1. a good/service that can be used by 1. a good/service that can be used by many at the same time without diminishing many at the same time without diminishing any one person’s consumption; any one person’s consumption;

2. it is difficult to exclude someone who 2. it is difficult to exclude someone who didn’t pay.didn’t pay.

3. Provided by the government, paid for by 3. Provided by the government, paid for by your tax dollarsyour tax dollars

ExamplesExamples

What services does the What services does the Government provide to the Government provide to the

American People?American People?National DefenseNational Defense

Public EducationPublic Education

Court SystemCourt System

LighthousesLighthouses

Weather ForecastsWeather Forecasts

Police/firePolice/fire

National ForestsNational Forests

DamsDams

RoadsRoads

Social SecuritySocial Security

Public TransportationPublic Transportation

GrantsGrants

The "free-rider" problem The "free-rider" problem

Why don’t towns charge admission

for 4th of July fireworks displays?

Free-RiderFree-Rider

Someone who would not pay for a service, but Someone who would not pay for a service, but would get the benefits if it were a public good. would get the benefits if it were a public good.

Did you pay for your Quiz answers???Did you pay for your Quiz answers???What was your incentive? What was your incentive? If there is little incentive to pay, what happens If there is little incentive to pay, what happens

to the amount of goods and services provided?to the amount of goods and services provided?If people won’t pay, who provides them? How?If people won’t pay, who provides them? How?Homework: Interview 3 adults and Homework: Interview 3 adults and

complete the survey form .complete the survey form .

Public Goods Wrap-up

Why don’t we depend on the private sector for all goods and services?

What is an example of a pure/nearly pure good/service?

What is an example of pure private good?

What is an example of a good or service, paid for by tax dollars that may not be a pure good?

Public Goods

Find them in the news…

Government Intervention:Government Intervention:Correcting Market FailuresCorrecting Market Failures

Externalities Externalities are defined as third are defined as third party (or party (or spill-overspill-over) effects arising ) effects arising from the production and/or from the production and/or consumption of goods and services consumption of goods and services for which no appropriate for which no appropriate compensation is paid. compensation is paid. 

They can be positive or negativeThey can be positive or negative

Externalities in English??? Market Prices reflect

the benefits and costs received by the producers and consumers involved in an exchange.

They do not reflect cost to others.

What is the cost (externality) to the customer in pink?

QuickTime™ and a decompressor

are needed to see this picture.

Is it a positive or negative externality?

Contributions to public radio or television Positive

Car Exhaust Negative

Barking dog in city neighborhood Negative

Is it a positive or negative externality?

Apartment dwellers who buy fire extinguishers positive

Crying babies on crowded airplanes Very negative

Life on Dismal Lake

A study in externalities…

Part 1: 4 volunteers