1. Benefits of Free Enterprise
Chapter 3
Benefits of Free Enterprise

2. Section 1: Benefits of Free Enterprise
Objectives:
Define the basic principles of the US free enterprise system.
Describe the role of the consumer in the American economy.
Identify the constitutional protections that underlie free enterprise.
Explain why the government may intervene in the marketplace.

3. Basic principles of free enterprise
22 million unincorporated businesses in the US
Profit Motive
The incentive that drives individuals and business owners to improve their material well-being
Forces business owners to exercise financial discipline
Take rational risks
Rewards innovation
Efficient companies make more money

4. Open Opportunity Legal Equality Private Property
Principle market anyone can compete in the marketplace
Legal Equality
Private Property
Control your possessions and use them anyway you see fit
Freedom to buy and sell
Free Contract – people may decide the agreements they enter into
Voluntary Exchange – people may decide when, where, and how they want to buy and sell

5. The Role of the Consumer
Voluntary exchanges
Signals sent when buying OR not buying a good or service
Interest groups – private organization that tries to persuade public officials to act in way that benefit its members
Consumers Union
National Retail Federation

6. Economic Freedom and the Constitution
Property Rights – 5th and 14th amendments
Protects people’s private property
Eminent domain – the right of the government to take private property for public use

7. Taxation Contracts 16th amendment – income tax
Legally binding agreements

8. The Role of the Government in the marketplace
Promote public interest (concerns of society as a whole)
Information and free enterprise
Educated consumers
Public disclosure laws
Requires companies to provide information about their products or services

9. Protecting the health, safety, and well-being
Protect consumers
Foods
Drugs
EPA

10. Negative effects of Regulation
Costly to businesses
Slows growth
Higher prices
Increased government spending

11. Section 2: Promoting Growth and Stability
Objectives:
Explain why the government tracks and seeks to influence business cycles.
Describe how the government promotes economic strength.
Analyze the factors that increase productivity.

12. Tracking Business Cycles
Macroeconomics – study of economic behavior and decision-making in a nation’s whole economy
BIG picture
Microeconomics – study of economic behavior and decision-making in small units, such as households and firms
Small picture

13. GDP and the Business Cycle
Gross Domestic Product (GDP) – total value of all final goods and services produced in a country in a given year
Economic growth = country produces more than it did before
Business cycle – period of macroeconomic expansion, or growth, followed by one of contraction, or decline

14. Promoting Economic Strength
Employment
4 – 6%
Economic Growth
Cut spending? Increase taxes?
Stability and Security?
Level of prices, banking etc.
Economic Citizenship
Voting
Referendums – proposed law submitted directly to the public

15. Technology and productivity
Technological Progress
Increasing production -> more output from smaller quantity of input
Innovation = obsolescence
Government’s Role
land grants (MIT, Texas A&M)
NASA
Patents – license that gives the inventor of a new product the exclusive right to produce and sell it
Copyright – license that grants an author exclusive rights to publish and sell creative works

16. The American Work Ethic
“I’ve never really viewed myself as particularly talented. I’ve view myself as slightly above average in talent. And where I excel is ridiculous, sickening work ethic. You know, while the other guy’s sleeping? I’m working. While the other guy’s eating? I’m working.”
- Will Smith, 60 Minutes interview

17. Section 3: Providing Public Goods
Objectives:
Identify examples of public goods.
Analyze market failures.
Evaluate how the government allocates some resources by managing externalities.

18. Public Goods
A shared good or service for which it would be inefficient of impractical to make consumers pay individually and to exclude those who did not pay

19. Public Sector Private Sector Transactions with the government
Transactions with individuals

20. Costs and Benefits Infrastructure 2 cost-benefit criteria
The basic facilities that are necessary for a society to function
2 cost-benefit criteria
1. the benefit to each individual is less than the cost that each would have to pay if it were provided privately.
2. The total benefits to society are greater than the total cost

21. Free-Rider Problem
Someone who not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good

22. The Tragedy of the Commons
Many colonial New England towns recognized 2 types of land: privately owned land and publicly owned pasture, called the commons. Farmers limited the number of animals grazing on their privately owned land to keep it productive and profitable for the long run.
On the other hand, anyone could place their animals on the commons. Many people, acting out of self-interest, did this without limit. There were no costs involved and in the short run, it was profitable. In the long run, however, the cattle created an unproductive, muddy field.
When a natural resource is held in common and is overused because of self- interest, the situation is called “The Tragedy of the Commons.”

23. “Wealth that is free for all is valued by none because he who is foolhardy enough to wait for its proper time of use will only find that is has been taken by another.” – H. Scott Gordon, 1954
How does this quotation describe the tragedy of the commons?
No country owns the open seas: they can be used by anyone. Some areas of the ocean are changing because of over-fishing.
How is this situation an illustration of the tragedy of the commons?

24. Section 4: Providing a Safety Net
Objectives:
Explain the US political debated on ways to fight poverty.
Identify the main programs through which the government redistributes income.
Describe how the government encourages private efforts to help the needy.

25. The Poverty Problem Poverty Threshold
Income level below that which is needed to support families or households
2011: family of 4 – 22,000

26. The Government’s Role
The Welfare System
Government aid for the poor

31. Redistribution Programs
Cash Transfers
Direct payments
TANFL (Temporary Assistance for Needy Families)
Social Security
Unemployment Insurance
Worker’s Compensation

32. In-kind Benefits Medical Benefits Education
Goods or services provided for free or at greatly reduced prices (food stamps, subsidized housing, public defenders)
Medical Benefits
Medicare, Medicaid, CHIP
Education

33. Encouraging Private Action
Grants
Financial award

34. Market Failures Externalities
Situation in which the free market does not distribute resources efficiently
Externalities
Side of effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume
Positive
Negative