Chapter 3 Section 5

 Understand the important role government plays in free enterprise by enforcing contracts and providing certain types of goods  Be able to evaluate government’s role in promoting “positive externalities” and minimizing or eliminating “negative externalities”

 Government enforces contracts through several means  Maintains civil justice system (courts)  Criminal laws to punish people who commit fraud, false advertising, etc.

 Review question: What distinguishes public property from private property?  A similar concept is public vs. private goods  Private—one person’s consumption takes away from another’s consumption (examples: pizza, computer)  Public—one person’s consumption does not take away another’s consumption (examples: movies, lectures)  Movies and lectures are excludable public goods—don’t pay, you don’t get in  What about national defense? It is a nonexcludable public good … everyone gets the benefit  Because there is no profit in producing nonexcludable public goods like national defense, government has to provide them (people won’t pay for things they can’t be kept from consuming).  Government’s power to tax allows it to do this  “Free rider” problem—dust control on Montana dirt roads

 Positive externality—a beneficial side effect of an action that is felt by others (bees pollinating an adjacent orchard; “herd immunity” resulting from public vaccination programs)  Negative externality—an adverse side effect of an action that is felt by others (neighbor’s poorly maintained yard reduces value of your home)  Depending on political will, government may subsidize actions that generate positive externalities (education—student loan programs and grants) and punish negative externalities (fines for polluters).  Unintended consequences may result (tax on new cars may cause people to drive older, more-polluting cars longer)

 Answer questions 2, 3 and 4 on page 81. Turn in for class participation credit.