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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
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
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?
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