Chapter 3

 Free Enterprise System  Anyone is free to start a business or enterprise  Private ownership of factors of production  EX:U.S.  Free to start up  Choose where to exchange  Choose goods

Key Concepts  System gives rights to own and exchange private property voluntarily  Open Opportunity-ability to enter, compete in market of one’s choice  Legal Equality-Everyone has the same economic rights under the law  Free Contract-Right to decide which legal agreements to enter into  Profit Motive-Incentive to gain from economic activities

Key ConceptsExample  Consumers try to get the best deal for their money  Produces try to earn the most profits  Profits-money left after production costs subtracted from sale price  Producers seek profit  Neighborhood coffee shop shows how producers help allocate resources To earn profits, charge highest price customers will pay Profits encourage others to open similar businesses Result: productive resources directed toward coffee shops

Key ConceptsModified Free Enterprise  Important  Limited  Modified Free Enterprise Economy- government protections, provisions, regulations that adjust capitalism  Like businesses and households, government is a producer and consumer  As consumer, buys factors of production in resource market  As consumer, buys products in product market  As producer, provides goods and services to businesses, households  Collects taxes in payment, uses these to pay for resources, products

Providing Public GoodsExamples  Public Sector- branches of govt. that make production decisions  Market Failure-outsiders benefit from or pay for marketplace interaction  Public Goods- products provided by government, consumed by public  Public goods funded with taxes  2 Characteristics of Public Goods  People who do not pay cannot be excluded  One person’s use does not make product less useful to others  Street lighting, national defense  Impossible to determine price or benefit per user

Free Riders Public and Private Sectors Share Responsibilities  No incentive for business to produce public goods- people will not pay  Free Rider-person who benefits but does not pay for a good or service  Only way to have public goods is for government to fund with taxes  Some goods provided by either public or private sector  Toll goods-consumed by public but people can be excluded  Often initial funding public, daily operations private  Infrastructure-goods and services needed for a society to function

Key Concepts  Market failure occurs when economic transactions cause externalities  Externality- side effect on someone other than producer or buyer  Negative Externality- people uninvolved in the transaction pay costs  Positive Externality- benefits people uninvolved in transaction

Example 1Example 2  Paying for Negative Externalities  Factory owners- little incentive to pay to cut industrial pollution  People of region pay cleanup cost, have illnesses and medical bills  Government limits negative externalities through taxes and fees Offset medical costs, reduce pollution  Spreading Positive Externalities  A new college benefits local businesses, community as whole  Government tries to increase positive externalities  Subsidy-government payment to help cover cost of economic activity

Key ConceptsRedistributing Income  A limitation of free enterprise:  People unable to contribute cannot access all economic opportunities  Safety net- government programs designed to protect people from economic hardship  Transfer Payments move income from person or group to another  Receipient does not provide in return  Public transfer payment – made by government with tax money  Most public transfer payments in area of social spending  Usually go to poor, aged, disabled, or people who lose their jobs

Vocabulary Free Enterprise SystemWhere anyone is free to enter the business market. Open Opportunityability to enter, compete in market of one’s choice Legal EqualityEveryone has the same economic rights under the law Free ContractRight to decide which legal agreements to enter into Profit MotiveIncentive to gain from economic activities Profit-money left after production costs subtracted from sale price

Vocabulary Modified Free Enterprise Economy government protections, provisions, regulations that adjust capitalism Market Failureoutsiders benefit from or pay for marketplace interaction Public Goodsproducts provided by government, consumed by public Free Riderperson who benefits but does not pay for a good or service Infrastructure-goods and services needed for a society to function Externalityside effect on someone other than producer or buyer

Vocabulary Megative Externalitypeople uninvolved in the transaction pay costs Positive Externalitybenefits people uninvolved in transaction Subsidy-government payment to help cover cost of economic activity Safety Netgovernment programs designed to protect people from economic hardship Transfer PaymentsTo move income from person or group to another Public Transfer Payments– made by government with tax money