Government and free enterprise Chapter 3-3 Government and free enterprise

Key Concepts Market Failure- occurs when people who are not part of a marketplace interaction benefit from it or pay part of its costs. Public goods- are products by federal, state, and local governments and consumed by the public as a group.

Characteristics of public goods There is no incentive for business to produce public goods, because people will not voluntarily pay for them. This situation is called the free-rider problem, and it is one type of market failure. Free Rider- a person who avoids paying for a good or service but who benefits from that good or service anyway. There is no way to charge people for fireworks.

Public and Private Sector—Shared Responsibility Some goods can be provided by the public sector or the private sector. Example: toll roads, entrance fee to a park The private and public sector share responsibility for the nation’s infrastructure. Solid infrastructure is a key component to a healthy economy. Infrastructure- consists of all the goods and services that are necessary for the functioning of society. Highways Mass transit Power Water Sewer systems Airports

U.S. Infrastructure Is in Dire Straits, Report Says US infrastructure gets a “D” grade for the American Society of Civil Engineers.

Managing Externalities An externality is a side effect of a product that affects someone other than the producer or the buyer. A negative externality is an externality that imposes costs on people who were not involved in the original economic activity. A positive externality is an externality that creates benefits for people who were not involved in the original economic activity.

The costs of pollution are borne by everyone. negative externality The costs of pollution are borne by everyone. Limiting negative externalities is one of the role of the American government in the economy.

positive externality Maintaining a nice garden is a positive externality because all the surrounding homes benefit from the beauty.

Spreading Positive Externalities If a new college is built in your town, local businesses benefit from student purchases of goods and services. Students are taxed which goes towards the advancement of the town. Everyone benefits from a more educated work force.

Subsidy Just as government tries to limit negative externalities, it tries to increase positive externalities. Subsidy- is a government payment that helps cover the cost of an economic activity that is considered to be in the public interest. Since subsidies are paid for with tax dollars everyone shares in the cost. -new vaccination

Public Transfer Payments Safety net consists of governement programs designed to protect people from economic hardship. Transfer payments are transfers of income from one person or group to another even though the receiver does not provide anything in return. A public transfer system is a transfer payment in which the government transfers income from taxpayers to recipients who do not provide anything in return.