Government and Free Government and Free EnterpriseEnterprise

Chapter 3, Section 3Chapter 3, Section 3

Economics Economics

How do we know when How do we know when government SHOULD provide a government SHOULD provide a

good or service?good or service? There are transactions where both buyer and There are transactions where both buyer and seller assume the cost and benefitseller assume the cost and benefit These are mostly left to the These are mostly left to the Free Enterprise (or Free Enterprise (or

“private”) “private”) sector of our economysector of our economy Buying a car, for exampleBuying a car, for example

But there are other transactions in which But there are other transactions in which someone OTHER than the buyer or seller someone OTHER than the buyer or seller benefits or pays the costbenefits or pays the cost In this case, we say that a “market failure” has In this case, we say that a “market failure” has

occurred. occurred. And in these cases, government sometimes will And in these cases, government sometimes will

provide the good or service.provide the good or service. The The PUBLIC SECTORPUBLIC SECTOR

Military, social security, etc.Military, social security, etc.

Public Sector GoodsPublic Sector GoodsAll of the goods and services provided by All of the goods and services provided by

the gov’t - funded by taxesthe gov’t - funded by taxesEx. Street lighting system, police and fire Ex. Street lighting system, police and fire

departments, education departments, education

• 2 characteristics:• Can’t be taken away even though you don’t pay directly for them.• Your use of the good/service does not diminish or reduce another’s use of the good or service.• Street lights, military, fire department

The “Free Rider” problemThe “Free Rider” problem

A person who chooses A person who chooses not to pay for a good or not to pay for a good or service, but who service, but who benefits from it anywaybenefits from it anyway

Since this problem Since this problem exists, businesses will exists, businesses will sometimes choose NOT sometimes choose NOT to provide some to provide some servicesservicesWhere those services are Where those services are

demanded, government demanded, government will often step inwill often step in

Fireworks displayFireworks display

Shared ResponsibilitiesShared Responsibilities

Sometimes the private and public Sometimes the private and public sector share the responsibility for a sector share the responsibility for a good or servicegood or serviceToll roads, some parks (camping fees)Toll roads, some parks (camping fees)

Most infrastructure, mass transit, highways, water and sewer costs are funded by both the private and public sector

Managing ExternalitiesManaging Externalities

Externality- Externality- Side effect of a Side effect of a

transaction which transaction which affects someone affects someone other than buyer or other than buyer or sellerseller

Negative Externality- Negative Externality- Imposes costs on Imposes costs on

people who were not people who were not involvedinvolvedPollutionPollution

Gov’t seeks to limit Gov’t seeks to limit these through these through regulationsregulations

Positive ExternalityPositive Externality

This creates This creates benefitsbenefits for people who for people who were not involved with economic were not involved with economic activityactivity

I open up a Taco Bell in Cranberry. It will I open up a Taco Bell in Cranberry. It will create jobs, bring in other businesses, and create jobs, bring in other businesses, and increase home valuesincrease home values

Gov’t works to increase these positive Gov’t works to increase these positive externalities, sometimes using externalities, sometimes using subsidiessubsidies

Gov’t SubsidiesGov’t Subsidies

Gov’t provides money to help cover Gov’t provides money to help cover the cost of an economic activity that the cost of an economic activity that may help lots of people.may help lots of people.

May provide money to drug developer for new May provide money to drug developer for new medicines which will benefit whole communitymedicines which will benefit whole community

What would be another example of a community benefit through subsidy money?

Transfer PaymentsTransfer PaymentsTransfer of Transfer of

income from one income from one person or group person or group to another even to another even though the payer though the payer receives nothing receives nothing in returnin returnGov’t provides Gov’t provides

safety net safety net programs to programs to protect people protect people from economic from economic hardshiphardship

Ex. Welfare, Social Ex. Welfare, Social Security, Security, Unemployment benefitsUnemployment benefits

So…our government does get So…our government does get involved in our economic involved in our economic

system for various reasons…system for various reasons…How does this compare to other How does this compare to other

nations?nations?