American Free EnterpriseCh. 3

Principles of Free Enterprise

• Profit Motive

• Open Opportunity – aka. Equality of Opportunity

• Economic Rights– Legal Equality– Private Property– Freedom of Contract

What is the Government’s Role in the Economy?

• Protect economic rights

• Provide public goods

• Provide safety nets

Private Property

• Private Property - property that is under the control of a single individual or group of individuals collectively.– Real Property - land and anything that is

permanently attached to the land.– Personal Property - all other property that is

movable and not fixed to the land.

• Public Property - property that is controlled by the state or a community.

Private Property Rights

• There are many “rights” associated with owning private property, such as:– The right to control of the use of the property

– The right to any benefits from the property • ex. mining rights and rent

– The right to transfer or sell the property

– The right to exclude others from the property.

The Constitution Protects Private Property

• 5th Amendment:“No person shall… be deprived of life, liberty or

property without due process of law; Nor shall private property be taken for public use without just compensation.”

What Is a Public Good?

• A public good is a shared good or service for which it would be inefficient or impractical – To make consumers pay individually– To exclude non-payers.

• Examples:– Roads & Bridges– Dams– National Parks– The Space Program (NASA)

When Should Something Be Considered a Public Good?

• Cost is critical in determining whether something gets produced as a public good:– The benefit to each individual is less than than the

cost individuals would pay privately; and– The total benefits to society are greater than the

total costs.

• Under these circumstances, the private sector has little incentive to produce the good and so the government must step in.

The Free-Rider Problem

• A free-rider is someone who would not choose to pay for a certain goods/services, but who would benefit anyway when they are provided as a public good. – Free-riders consume what they do not pay for.

• Examples ???

What Are Externalities?

• An externality is an economic side effect of a good or service that generates a benefit or cost to someone other than the person making the economic decision– Positive Externalities - beneficial side effects– Negative Externalities - unintended costs

The Government Decides to Construct a New Dam…

Positive Externalities• Opportunities for

recreation (swimming, boating, fishing);

• Increased home values for homes with lake front views

• Reduced flooding during the winter.

Negative Externalities• Loss of wildlife habitat

due to flooding above the dam;

• Over crowding due to tourism;

• Noise from racing boats and other watercraft.

Market Failures

• A market failure is a situation in which the market, on its own, does not distribute resources efficiently.– The free-rider problem is an example of a market

failure because the market is not producing certain goods/services

– Externalities are also market failures because the costs/benefits are not assigned properly.

Market Failures cont.

• The government steps in to correct these failures by: – Providing the public with certain

goods/services;– Encouraging the creation of positive

externalities and limiting negative externalities

Your Turn - Think About It!!

• The City decides to purchase an abandoned metals processing plant and the surrounding land

• The city wants to tear down the building and turn the land into a recreational park for city dwellers, complete with basketball courts, baseball fields, tennis courts, a swimming pool and bike paths.

• What are the pros and cons of this plan?

What is a Safety Net?

• Safety Net – Government programs that protect people experiencing unfavorable economic conditions.

• Wealth Redistribution Programs– Welfare – a general term that refers to

government aid to the poor;• Temporary Assistance for Needy Families

• Social Security

• Unemployment Insurance

• Medicare/Medicaid