1. Chapter 3

2.  Free Enterprise System  Anyone is free to start a business or enterprise  Private ownership of factors of production  EX:U.S.  Free to start up  Choose where to exchange  Choose goods

3. Key Concepts  System gives rights to own and exchange private property voluntarily  Open Opportunity-ability to enter, compete in market of one’s choice  Legal Equality-Everyone has the same economic rights under the law  Free Contract-Right to decide which legal agreements to enter into  Profit Motive-Incentive to gain from economic activities

4. Key ConceptsExample  Consumers try to get the best deal for their money  Produces try to earn the most profits  Profits-money left after production costs subtracted from sale price  Producers seek profit  Neighborhood coffee shop shows how producers help allocate resources To earn profits, charge highest price customers will pay Profits encourage others to open similar businesses Result: productive resources directed toward coffee shops

5. Key ConceptsModified Free Enterprise  Important  Limited  Modified Free Enterprise Economy- government protections, provisions, regulations that adjust capitalism  Like businesses and households, government is a producer and consumer  As consumer, buys factors of production in resource market  As consumer, buys products in product market  As producer, provides goods and services to businesses, households  Collects taxes in payment, uses these to pay for resources, products

6. Providing Public GoodsExamples  Public Sector- branches of govt. that make production decisions  Market Failure-outsiders benefit from or pay for marketplace interaction  Public Goods- products provided by government, consumed by public  Public goods funded with taxes  2 Characteristics of Public Goods  People who do not pay cannot be excluded  One person’s use does not make product less useful to others  Street lighting, national defense  Impossible to determine price or benefit per user

7. Free Riders Public and Private Sectors Share Responsibilities  No incentive for business to produce public goods- people will not pay  Free Rider-person who benefits but does not pay for a good or service  Only way to have public goods is for government to fund with taxes  Some goods provided by either public or private sector  Toll goods-consumed by public but people can be excluded  Often initial funding public, daily operations private  Infrastructure-goods and services needed for a society to function

8. Key Concepts  Market failure occurs when economic transactions cause externalities  Externality- side effect on someone other than producer or buyer  Negative Externality- people uninvolved in the transaction pay costs  Positive Externality- benefits people uninvolved in transaction

9. Example 1Example 2  Paying for Negative Externalities  Factory owners- little incentive to pay to cut industrial pollution  People of region pay cleanup cost, have illnesses and medical bills  Government limits negative externalities through taxes and fees Offset medical costs, reduce pollution  Spreading Positive Externalities  A new college benefits local businesses, community as whole  Government tries to increase positive externalities  Subsidy-government payment to help cover cost of economic activity

10. Key ConceptsRedistributing Income  A limitation of free enterprise:  People unable to contribute cannot access all economic opportunities  Safety net- government programs designed to protect people from economic hardship  Transfer Payments move income from person or group to another  Receipient does not provide in return  Public transfer payment – made by government with tax money  Most public transfer payments in area of social spending  Usually go to poor, aged, disabled, or people who lose their jobs