chapter 3 benefits of free enterprise. section 1: benefits of free enterprise objectives: define the...

CHAPTER 3Benefits of Free Enterprise

SECTION 1: BENEFITS OF FREE ENTERPRISE

• Objectives: • Define the basic principles of the US free enterprise system. • Describe the role of the consumer in the American economy.• Identify the constitutional protections that underlie free enterprise. • Explain why the government may intervene in the marketplace.

BASIC PRINCIPLES OF FREE ENTERPRISE

• 22 million unincorporated businesses in the US

• Profit Motive • The incentive that drives individuals and business owners to improve their

material well-being• Forces business owners to exercise financial discipline • Take rational risks • Rewards innovation • Efficient companies make more money

• Open Opportunity• Principle market anyone can compete in the marketplace

• Legal Equality

• Private Property • Control your possessions and use them anyway you see fit

• Freedom to buy and sell • Free Contract – people may decide the agreements they enter into • Voluntary Exchange – people may decide when, where, and how they want to

buy and sell

THE ROLE OF THE CONSUMER

• Voluntary exchanges

• Signals sent when buying OR not buying a good or service

• Interest groups – private organization that tries to persuade public officials to act in way that benefit its members • Consumers Union • National Retail Federation

ECONOMIC FREEDOM AND THE CONSTITUTION

• Property Rights – 5th and 14th amendments • Protects people’s private property • Eminent domain – the right of the government to take private property for

public use

• Taxation• 16th amendment – income tax

• Contracts • Legally binding agreements

THE ROLE OF THE GOVERNMENT IN THE MARKETPLACE

• Promote public interest (concerns of society as a whole)

• Information and free enterprise • Educated consumers • Public disclosure laws

• Requires companies to provide information about their products or services

PROTECTING THE HEALTH, SAFETY, AND WELL-BEING

• Protect consumers • Foods• Drugs • EPA

NEGATIVE EFFECTS OF REGULATION

• Costly to businesses

• Slows growth

• Higher prices

• Increased government spending

SECTION 2: PROMOTING GROWTH AND STABILITY

• Objectives: • Explain why the government tracks and seeks to influence business cycles. • Describe how the government promotes economic strength. • Analyze the factors that increase productivity.

TRACKING BUSINESS CYCLES

• Macroeconomics – study of economic behavior and decision-making in a nation’s whole economy• BIG picture

• Microeconomics – study of economic behavior and decision-making in small units, such as households and firms • Small picture

• GDP and the Business Cycle • Gross Domestic Product (GDP) – total value of all final goods and services

produced in a country in a given year • Economic growth = country produces more than it did before • Business cycle – period of macroeconomic expansion, or growth, followed by

one of contraction, or decline

PROMOTING ECONOMIC STRENGTH

• Employment • 4 – 6%

• Economic Growth • Cut spending? Increase taxes?

• Stability and Security?• Level of prices, banking etc.

• Economic Citizenship • Voting • Referendums – proposed law submitted directly to the public

TECHNOLOGY AND PRODUCTIVITY

• Technological Progress • Increasing production -> more output from smaller quantity of input • Technological Progress

• Innovation = obsolescence • Government’s Role

• land grants (MIT, Texas A&M)• NASA • Patents – license that gives the inventor of a new product the exclusive right to

produce and sell it • Copyright – license that grants an author exclusive rights to publish and sell

creative works

THE AMERICAN WORK ETHIC

• “I’ve never really viewed myself as particularly talented. I’ve view myself as slightly above average in talent. And where I excel is ridiculous, sickening work ethic. You know, while the other guy’s sleeping? I’m working. While the other guy’s eating? I’m working.”

• - Will Smith, 60 Minutes interview

SECTION 3: PROVIDING PUBLIC GOODS

• Objectives: • Identify examples of public goods. • Analyze market failures. • Evaluate how the government allocates some resources by managing

externalities.

PUBLIC GOODS

• A shared good or service for which it would be inefficient of impractical to make consumers pay individually and to exclude those who did not pay

• Public Sector • Transactions with the government

• Private Sector • Transactions with individuals

COSTS AND BENEFITS

• Infrastructure • The basic facilities that are necessary for a society to function

• 2 cost-benefit criteria • 1. the benefit to each individual is less than the cost that each would have to

pay if it were provided privately. • 2. The total benefits to society are greater than the total cost

• Free-Rider Problem • Someone who not be willing to pay for a certain good or service but who

would get the benefits of it anyway if it were provided as a public good

THE TRAGEDY OF THE COMMONS

• Many colonial New England towns recognized 2 types of land: privately owned land and publicly owned pasture, called the commons. Farmers limited the number of animals grazing on their privately owned land to keep it productive and profitable for the long run.

• On the other hand, anyone could place their animals on the commons. Many people, acting out of self-interest, did this without limit. There were no costs involved and in the short run, it was profitable. In the long run, however, the cattle created an unproductive, muddy field.

• When a natural resource is held in common and is overused because of self-interest, the situation is called “The Tragedy of the Commons.”

• “Wealth that is free for all is valued by none because he who is foolhardy enough to wait for its proper time of use will only find that is has been taken by another.” – H. Scott Gordon, 1954 • How does this quotation describe the tragedy of the commons?

• No country owns the open seas: they can be used by anyone. Some areas of the ocean are changing because of over-fishing.• How is this situation an illustration of the tragedy of the commons?

SECTION 4: PROVIDING A SAFETY NET

• Objectives: • Explain the US political debated on ways to fight poverty. • Identify the main programs through which the government redistributes

income. • Describe how the government encourages private efforts to help the needy.

THE POVERTY PROBLEM

• Poverty Threshold • Income level below that which is needed to support families or households

• 2011: family of 4 – 22,000

• The Government’s Role

• The Welfare System • Government aid for the poor

REDISTRIBUTION PROGRAMS

• Cash Transfers • Direct payments • TANFL (Temporary Assistance for Needy Families) • Social Security • Unemployment Insurance • Worker’s Compensation

• In-kind Benefits • Goods or services provided for free or at greatly reduced prices (food stamps,

subsidized housing, public defenders)

• Medical Benefits • Medicare, Medicaid, CHIP

• Education

ENCOURAGING PRIVATE ACTION

• Grants • Financial award

• Market Failures • Situation in which the free market does not distribute resources efficiently

• Externalities • Side of effect of a good or service that generates benefits or costs to

someone other than the person deciding how much to produce or consume • Positive • Negative