1. CHAPTER 3: SECTION 5 The Role of Government in a Free Enterprise Economy Government as Enforcer of Contracts A contract is an agreement between two or more people to do something. Could the free enterprise system function without a government to enforce contracts? Probably not as well, because the risks of going into business would be too great.

2. Government as Provider of Non-excludable Public Goods Goods are categorized as two major types: private goods and public goods. A private good is a good in which one person’s consumption takes away from another person’s consumption. Examples include food and gas. A public good is a good in which one person’s consumption does not take away from another person’s consumption. An example would be a movie in a movie theater.

3. A public good can be excludable or non-excludable. An excludable public good is a public good that individuals can be excluded (physically prohibited) from consuming. An example would be a college lecture, which is available only to enrolled students of the college. A non-excludable public good is a public good that individuals cannot be excluded from consuming.

4. Who will want to produce a nonexcludable public good? Economists say that in a free enterprise system, no one will want to. After all, people will not pay for something they get anyway. However, even in a free enterprise economy, people want non- excludable public goods, such as national defense or flood protection (dams). Who will produce these goods? The government will provide non-excludable public goods and pay for them with taxes.

5. If the government is producing these goods, then how does the public have a say in what goods are produced? U.S. citizens have the right to vote, and they can influence what government does by exercising that right.

6. Externalities There are two kinds of externalities: negative and positive externalities. A negative externality is an adverse side effect of an act that is felt by others. A positive externality is a beneficial side effect of an action that is felt by others.

7. Some people argue that education generates positive externalities. What you learn at school will not only help you earn a living, but also help you become a better citizen and a more informed voter. Following that argument, if the public benefits from your education and the education of others, then the public should pay for that education. Some people argue that government should pay for all activities that generate positive externalities for society.

8. When it comes to negative externalities, some might say that the role of government is to reduce the negative externalities. Government can reduce the negative externalities through the following: the court system, regulation, and taxation. If you have a complaint against a negative externality, the courts are available to hear your case and find a resolution. The government creates regulations, such as speed limits and pollution standards, to deal with negative externalities.