Chapter 3Chapter 3

American Free EnterpriseAmerican Free Enterprise

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 – Individuals – work wherever work wherever they choosethey choose

Businesses – Businesses – hire whomever hire whomever they choosethey choose

Government – Government – minimal minimal interventionintervention

CompetitionCompetition

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

Consumers benefit as a resultConsumers benefit as a result

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

the competition?the 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 businesses can buy and sell buy and sell property and property and limit its use.limit its use.

ContractsContracts

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

Self-InterestSelf-Interest

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

Voluntary ExchangeVoluntary Exchange

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

Profit MotiveProfit Motive

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

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

American People?American People?Public WorksPublic Works

Medicaid/MedicareMedicaid/Medicare

Disaster ReliefDisaster Relief

UnemploymentUnemployment

WelfareWelfare

Police, FirePolice, Fire

EducationEducation

RoadsRoads

Social SecuritySocial Security

Public Public TransportationTransportation

GrantsGrants

Why does the Government Why does the Government Produce Goods and Services?Produce Goods and Services?

Public goods:Public goods: a good/service a good/service that can be used by many at the that can be used by many at the same time without diminishing same time without diminishing any one person’s consumption; any one person’s consumption; it is difficult to exclude it is difficult to exclude someone from the good.someone from the good.

ExamplesExamples

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

Why don’t towns charge admission for 4th of July

fireworks displays?

Why does the Government Why does the Government Produce Goods and Services?Produce Goods and Services?

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

Examples of positive Examples of positive externalitiesexternalities

a beautiful a beautiful garden on a busy garden on a busy streetstreet

the safer the safer neighborhood for neighborhood for others that others that results from some results from some residents hiring residents hiring private security private security patrolspatrols

What is significant What is significant about this picture? about this picture? What does it tell you What does it tell you about private property?about private property?

Free-RiderFree-Rider

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

Why is there pollution?Why is there pollution?

Examples of negative Examples of negative externalitiesexternalities

include an include an unmowed lawn in unmowed lawn in a suburban a suburban neighborhood, or neighborhood, or automobile automobile exhaust, or exhaust, or second-hand second-hand cigarette smoke. cigarette smoke.

ExternalitiesExternalities

What are the externalities What are the externalities created?  created?  SnowplowingSnowplowing A poker roomA poker room Garbage PickupGarbage Pickup HomelessnessHomelessness

Broken Windows Broken Windows TheoryTheory

"One unrepaired broken "One unrepaired broken window is a signal that window is a signal that no one cares, and so no one cares, and so breaking more windows breaking more windows costs nothing."costs nothing."

Broken windows policing assumes that Broken windows policing assumes that serious crime can be reduced by strongly serious crime can be reduced by strongly enforcing minor crimes.enforcing minor crimes.

The "broken window" theory suggests that The "broken window" theory suggests that neighborhood order strategies such as those neighborhood order strategies such as those listed below help to deter and reduce listed below help to deter and reduce crime. crime. Quick replacement of broken windows Quick replacement of broken windows Prompt removal of abandoned vehicles Prompt removal of abandoned vehicles Fast clean up of illegally dumped items, litter and Fast clean up of illegally dumped items, litter and spilled garbage spilled garbage

Quick paint out of graffiti Quick paint out of graffiti Finding (or building) better places for teens to gather Finding (or building) better places for teens to gather than street corners than street corners

Fresh paint on buildings Fresh paint on buildings Clean sidewalks and street guttersClean sidewalks and street gutters

Why does poverty exist in Why does poverty exist in the United States? What the United States? What

Safety nets exist?Safety nets exist?

Public Goods that cannot Public Goods that cannot be privately providedbe privately provided

Why does the Government Why does the Government Produce Goods and Services?Produce Goods and Services?

Merit goods: Merit goods: goods/services that goods/services that have a social value over and have a social value over and above their utility for the above their utility for the individual consumer.individual consumer.

What are the benefits of having a good school in your community?

Examples of Merit GoodsExamples of Merit Goods

IS THIS AN EXAMPLE OF MERIT GOOD? WHY OR WHY NOT?