Government and Free Enterprise Chapter 3, Section 3 Economics

How do we know when government SHOULD provide a good or service? There are transactions where both buyer and seller assume the cost and benefit These are mostly left to the Free Enterprise (or “private”) sector of our economy Buying a car, for example But there are other transactions in which someone OTHER than the buyer or seller benefits or pays the cost In this case, we say that a “market failure” has occurred. And in these cases, government sometimes will provide the good or service. The PUBLIC SECTOR Military, social security, etc.

Public Sector Goods 2 characteristics: All of the goods and services provided by the gov’t - funded by taxes Ex. Street lighting system, police and fire departments, education 2 characteristics: Can’t be taken away even though you don’t pay directly for them. Your use of the good/service does not diminish or reduce another’s use of the good or service. Street lights, military, fire department

The “Free Rider” problem A person who chooses not to pay for a good or service, but who benefits from it anyway Since this problem exists, businesses will sometimes choose NOT to provide some services Where those services are demanded, government will often step in Fireworks display

Shared Responsibilities Sometimes the private and public sector share the responsibility for a good or service Toll roads, some parks (camping fees) Most infrastructure, mass transit, highways, water and sewer costs are funded by both the private and public sector

Managing Externalities Externality- Side effect of a transaction which affects someone other than buyer or seller Negative Externality- Imposes costs on people who were not involved Pollution Gov’t seeks to limit these through regulations

Positive Externality This creates benefits for people who were not involved with economic activity I open up a Taco Bell in Cranberry. It will create jobs, bring in other businesses, and increase home values Gov’t works to increase these positive externalities, sometimes using subsidies

Gov’t Subsidies Gov’t provides money to help cover the cost of an economic activity that may help lots of people. May provide money to drug developer for new medicines which will benefit whole community What would be another example of a community benefit through subsidy money?

Transfer Payments Transfer of income from one person or group to another even though the payer receives nothing in return Gov’t provides safety net programs to protect people from economic hardship Ex. Welfare, Social Security, Unemployment benefits

So…our government does get involved in our economic system for various reasons… How does this compare to other nations?