American Free Enterprise Chapter 3 American Free Enterprise

Basic Characteristics of the U.S. Market System Private Property Free Enterprise Self-Interest Competition System of Markets and Prices Limited Government

What do these items have in common?

Public Disclosure Laws Requires companies to give full information about their products Makes buyers safer and informed or knowledgeable

Role of Government Provide Public Goods and Services Correct for Externalities Maintains Competition Establish Legal Framework Redistribute Income Reduce inflation and unemployment

1. Consumers influence producers through their buying decisions. Americans have traditionally favored economic freedom over economic regulation 1. Consumers influence producers through their buying decisions. 2. Consumers influence the government’s economic policies through voting and other techniques.

Public interest can be described as concerns of the public as a whole. Government responds to public interest by enacting public policy, or laws and standards on topics of public interest. Consumers can influence public policy through voting or by joining an interest group, which is a private organization that tries to persuade public officials.

Protecting Health, Safety, and Well-Being Major Federal Regulatory Agencies Many federal agencies regulate industries whose goods and services affect the well-being of the public. 1906 Food and Drug Administration (FDA) Sets and enforces standards for food, drugs, and cosmetic products Enacts and enforces antitrust laws to protect consumers 1914 Federal Trade Commission (FTC) Regulates interstate and international communications by radio, television, wire, and satellite, and cable 1934 Federal Communications Commission (FTC) Regulates civil aviation, air-traffic and piloting standards, and air commerce 1958 Federal Aviation Administration (FAA) Promotes equal job opportunity through enforcement of civil rights laws, education, and other programs 1964 Equal Employment Opportunity Commission (EEOC) Enacts policies to protect human health and the natural environment 1970 Environmental Protection Agency (EPA) Enacts policies to save lives, prevent injuries, and protect the health of workers 1970 Occupational Safety and Health Administration (OSHA) Enacts policies for reducing risks of harm from consumer products 1972 Consumer Product Safety Commission (CPSC) Regulates civilian use of nuclear products 1974 Nuclear Regulatory Commission

GDP Government promotes growth and stability One measure of a nation’s macroeconomy is gross domestic product (GDP). GDP is the dollar value of all final goods and services produced in a certain economy. Helps predict business cycles

Public Goods A public good is a shared good or service for which it would be impractical or inefficient to make consumers pay individually to exclude nonpayers. Examples of public goods: national parks, freeways Public goods are funded by the public sector, the part of the economy that involves transactions of the government. Cost determines whether it is a public good or not – the total benefit to society is greater than the total cost

Two Sectors Private – individuals, businesses, and non-government entities Public – government entities

Free Rider Public Goods create free riders. A free rider is someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it is provided as a public good.

Market Failures Would the free market ensure that roads are built everywhere they are needed? It’s doubtful. Neither could individuals afford to pay for a freeway. A market failure is a situation in which the market, on its own, does not distribute resources efficiently.

Externalities An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

Externalities: Examples http://www.youtube.com/watch?v=51wOisfdIPo Fracking Seinfeld and the smelly car http://www.yadayadayadaecon.com/clip/36/

Safety Nets When economic opportunities are limited, because of lack of resources or few educational opportunities, society encourages government programs to help provide a safety net for those who are living below what is considered an acceptable standard of living.

Poverty The poverty threshold is an income level below that which is needed to support families or households. The poverty threshold is determined by the federal government and is adjusted periodically. Welfare is a general term that refers to government aid to the poor. Provides Safety Net

Redistribution Programs Cash transfers are direct payments of money to eligible people.

Other Redistribution Programs In-kind benefits In-kind benefits are goods and services provided by the government for free or at greatly reduced prices. Examples: food stamps, subsidized housing, legal aid Medical benefits Health insurance is provided by the government for the elderly and disabled (Medicare) and for poor people who are unemployed or are not covered by their employer’s insurance (Medicaid). Education benefits Federal, state, and local governments all provide educational opportunities for the poor through grants.

John Stossel Video Clip Private Property Is Sharing Good?

Property Rights and Incentives

Incentives – rewards or punishment for behaviors The Buffalo Mystery Why do animals we profess to value and want to preserve continue to decline? Property Rights - formal and informal rules that govern the ownership, use, and transfer of property Incentives – rewards or punishment for behaviors The Buffalo Mystery Where did they go?

Tragedy of the Commons Common lands of the English villages were consistently overused and rapidly depleted No incentive to preserve or upgrade the value of the property when you don’t personally own it Common owners exploit a resource for fear that someone else will do it before they can

Can You Explain… Why free-roaming buffalo on the Great Plains almost disappeared but herds of cattle did not--even though the cattle were being driven to slaughter houses?

Buffalo has never been the major source of meat for most Americans. Beef, on the other hand, became a food of choice in the 19th Century and remains so today. In fact, in 2006, about 27,800,000,000 (yes that is billion) pounds of beef were consumed in the United States. And yet! No one has ever worried about the possibility of “cattle extinction,” and cows have never been near the Endangered Species List.

Buffalo Bill claimed to have killed 4000 buffalo himself when he worked for the Union Pacific Railroad.

When Americans began moving across the continent, more than 25 million buffalo roamed freely on the Great Plains. In fact, some estimates claim as many as 60 to 100 million. From 1840 to 1860 the herds declined as they were killed by Native Americans with horses and rifles. In the 1860s professional hunters joined the scene and the rate of decline increased. By 1890 the buffalo had almost disappeared. At that time, estimates of the number remaining varied from 500 to 1500.

Meriwether Lewis writes about the buffalo herds they saw,August 29,1806. "These last animals [the buffalo] are now so numerous that from an eminence we discovered more than we had ever seen before, at one time; and if it be not impossible to calculate the moving multitude, which darkened the whole plains, we are convinced that twenty thousand would be no exaggerated number."

Management of Elephants Participating rural communities monitor elephant herds Local communities issue trophy hunting permits - providing incentives to maintain the herd. Over $12,000 + a daily hunting fee of about $1000 / day. The safari leader usually gets the daily fee. Villagers receive the trophy fee and the “meet under a tree” and decide how it spent. 1989 international ban on the ivory trade, did not consider places like Zimbabwe where elephants are flourishing.

Where have the fish gone? Most commercial fishermen would like to maintain sustainable limits on fishing, yet stocks seem to decrease each year. Why?

Need incentives to preserve and protect. That is what is missing today for the elephants, pandas, whales. They are treated as common property. Buffalo were saved by the establishment of property rights to live buffalo. This establishes a great model to apply today when analyzing modern environmental issues and policies .