1. Government and Free Enterprise
Chapter 3, Section 3
Economics

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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?

9. 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

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