1. American Free Enterprise Ch. 3

2. Principles of Free Enterprise Profit Motive Open Opportunity –aka. Equality of Opportunity Economic Rights –Legal Equality –Private Property –Freedom of Contract

3. What is the Government’s Role in the Economy? Protect economic rights Provide public goods Provide safety nets

4. Private Property Private Property - property that is under the control of a single individual or group of individuals collectively. –Real Property - land and anything that is permanently attached to the land. –Personal Property - all other property that is movable and not fixed to the land. Public Property - property that is controlled by the state or a community.

5. Private Property Rights There are many “rights” associated with owning private property, such as: –The right to control of the use of the property –The right to any benefits from the property ex. mining rights and rent –The right to transfer or sell the property –The right to exclude others from the property.

6. The Constitution Protects Private Property 5th Amendment: “No person shall… be deprived of life, liberty or property without due process of law; Nor shall private property be taken for public use without just compensation.”

7. What Is a Public Good? A public good is a shared good or service for which it would be inefficient or impractical –To make consumers pay individually –To exclude non-payers. Examples: –Roads & Bridges –Dams –National Parks –The Space Program (NASA)

8. When Should Something Be Considered a Public Good? Cost is critical in determining whether something gets produced as a public good: –The benefit to each individual is less than than the cost individuals would pay privately; and –The total benefits to society are greater than the total costs. Under these circumstances, the private sector has little incentive to produce the good and so the government must step in.

9. The Free-Rider Problem A free-rider is someone who would not choose to pay for a certain goods/services, but who would benefit anyway when they are provided as a public good. –Free-riders consume what they do not pay for. Examples ???

10. What Are Externalities? An externality is an economic side effect of a good or service that generates a benefit or cost to someone other than the person making the economic decision –Positive Externalities - beneficial side effects –Negative Externalities - unintended costs

11. The Government Decides to Construct a New Dam… Positive Externalities Opportunities for recreation (swimming, boating, fishing); Increased home values for homes with lake front views Reduced flooding during the winter. Negative Externalities Loss of wildlife habitat due to flooding above the dam; Over crowding due to tourism; Noise from racing boats and other watercraft.

12. Market Failures A market failure is a situation in which the market, on its own, does not distribute resources efficiently. –The free-rider problem is an example of a market failure because the market is not producing certain goods/services –Externalities are also market failures because the costs/benefits are not assigned properly.

13. Market Failures cont. The government steps in to correct these failures by: –Providing the public with certain goods/services; –Encouraging the creation of positive externalities and limiting negative externalities

14. Your Turn - Think About It!! The City decides to purchase an abandoned metals processing plant and the surrounding land The city wants to tear down the building and turn the land into a recreational park for city dwellers, complete with basketball courts, baseball fields, tennis courts, a swimming pool and bike paths. What are the pros and cons of this plan?

15. What is a Safety Net? Safety Net – Government programs that protect people experiencing unfavorable economic conditions. Wealth Redistribution Programs –Welfare – a general term that refers to government aid to the poor; Temporary Assistance for Needy Families Social Security Unemployment Insurance Medicare/Medicaid