Goals: Role of Government in a Free Enterprise System – The students will 1. Work in the library for the first half of class 2. Learn about the government as an enforcer of contracts. 3. Learn about the government as the provider of nonexcludable public goods. 4. Learn about externalities.

 What is a contract? ◦ An agreement between two or more individuals that proposes consideration in exchange for a promise to do something.  What is consideration?  Something of value  In our society today, the government stands ready to enforce contracts through the courts. ◦ Can you describe a situation in which a trial would be necessary to prevent one business from dealing unfairly with another?

 Goods are categorized into two types: ◦ Private Goods  A good in which one person’s consumption takes away from another person’s consumption.  E.g., If Bill is working on the computer, Jane cannot use the computer. ◦ Public Goods  A good in which one person’s consumption does not take away from another person’s consumption.  E.g., a movie in a movie theater and a college lecture.

 Excludable Public Goods ◦ A good that individuals can be stopped from consuming it (physically excluded).  E.g., If you go to the movie theater and do not pay the ticket price, then the theater owner will not permit you to enter the theater.  Nonexcludable Public Goods ◦ A good that individuals cannot be stopped from consuming.  E.g., National defense is a public good because one person’s consumption of it does not detract from another person’s consumption.

 In a free enterprise system, economists believe no one will want to produce nonexcludable goods. Why? ◦ Because once it is produced, no one will pay for it since they can get the benefit free.  This is called a free rider.  What entity is the one that most generally produce nonexcludable goods?  The government. How does the government fund the production/operation?  Taxes. ◦ People in a free enterprise economy will produce those things that they can withhold from buyers if they do not get paid for producing them.

 Negative externality – an action that has an unintended adverse impact on a third party. ◦ What is an example?  A neighbor playing music so loud that you can hear it at your house.  Positive externality – an action that has a positive third party impact. ◦ What is an example?  When a beekeeper’s bees migrate to a neighbor’s flower bed.

 Court system – nuisance lawsuits  Government regulations – e.g., pollution standards  Taxation ◦ Be careful, raising taxes can do what to prices?

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