Ch. 3: American Free Enterprise Section 1: Benefits of Free Enterprise Property Rights Private property is the foundation of American Free Enterprise. Fifth Amendment: no person should be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation. Taxation The Constitution also provides rules for the ways government can tax. The Sixteenth Amendment (1913) gave Congress the authority to tax income. Principles of Free Enterprise Profit Motive: profit incentive leads to innovation Open opportunity: everyone can compete in the market Economic Rights Legal equality- rule of law allows everyone to participate in the marketplace. Private property- gives people the freedom to control their own possessions and businesses Economic Rights Free contract- people can choose what agreements they enter Voluntary exchange- the choice to buy/sell only if and when and individual wants to. Interest Groups Consumers can make their collective interests heard by joining private organizations that work at persuading public officials. Consumer Information Public disclosure laws: require companies to release information about their products. Government Regulation The government regulates businesses that affect public interest (concerns of the public) Zoning laws Environmental regulation Safety regulation Before Regulation Gilded Age Industry The Jungle (FDA) Working conditions Negative Effects of Regulation Regulation can impose difficult restrictions on businesses, limiting profits and efficiency. Major Federal Regulatory Agencies Food and Drug Administration (FDA) Federal Trade Commission (FTC) Federal Communications Commission (FCC) Federal Aviation Administration (FAA) Equal Employment Opportunity Commission (EEOC) Environmental Protection Agency (EPA) Occupational Safety and Health Administration (OSHA) Consumer Product Safety Commission (CPSC) Nuclear Regulatory Commission (NRC) Section 2: Promoting Growth and Stability Americas free enterprise economy seeks to promote both growth and stability; which can be competing priorities. Business Cycles Macroeconomics: studying entire economies Microeconomics: studying decision making of small units (individuals, families, businesses) Gross Domestic Product (GDP) GDP: The total value of all final goods and services produced in an economy. GDP reflects the level of productivity/wealth of a country. Economic Goals: Employment Maintaining high levels of employment is a goal of government. Unemployment rates between 3-6% are desirable. Economic Goals: Growth Growth of GDP and economic wealth is a goal of the US Economy. Economic Goals: Stability Stability is demonstrated by consistent prices, employment levels, and strong financial institutions (banks, investments) Productivity Productivity measures the level of economic output. Work ethic- commitment to hard work and production Technological Progress Improvements in technology enhance the economies productivity. What invention most significantly impacted society? Printing press, car, train, plane, telephone, television, computer, cell phone, camera? Section 3: Providing Public Goods Government provides some resources to everyone. Public vs. Private Public sector: part of the economy that the government operates. Private sector: part of the economy that individuals and businesses operate. Public Goods Public goods are shared goods or services. They exist when its impractical or inefficient For consumers to pay individually To exclude non-payers Examples: dams, roads, schools, parks What goods should be public? Is the total benefit to society greater than the cost? Free-Riders Free-riders are those who would use benefits but are not willing to pay for them. The free-rider problem suggests that if government stopped collecting taxes, many public services would not exist. Market Failure Market failure is when a free market will not naturally distribute resources efficiently. Recall Adam Smiths invisible hand metaphor Example of market failure: private roads Roads would charge expensive tolls due to no competition. Roads would not be built in less populated areas because of a lack of profit incentive. Market failure necessitates public goods. Externalities Externality is an economic side effect of an economic decision. Positive externality: creates positive side effects Negative externality: creates negative side effects Section 4: Providing a Safety Net The government provides safety nets for those in need. Poverty Threshold Poverty threshold is an income level necessary to support families and households. Poverty threshold/line in the US (15-20% of population) Individuals who make less than $12,000 Family of 4 that makes less than $22,000 Poverty in Manhattan In 2011, a startling report found Manhattan, NYC to have the greatest gap of wealth in the country. Annual income for Top 20%: $371,754 Bottom 20%: $9,845 Thinking about poverty Poverty can be caused by a number of things Historical social injustice Health problems Poor education systems Migration Poor decisions The Welfare System Before the 1930s, government did very little to provide for those in need. Since then, numerous welfare programs (government aid to the poor) have been started. Redistribution Programs Cash Transfers: Temporary Assistance for Needy Families (TANF) Social Security Unemployment Insurance Workers compensation Food Stamps Public Healthcare Medicare- Health insurance for the elderly (65+) and disabled Medicaid- Health insurance for the low income Education Government provides public education regardless of income. Provides additional funds and programs for those in need. Head Start Program College grants/loans