1. American Free Enterprise Chapter 3 Section 3 Providing Public Goods

2. American Free Enterprise Objectives: 1. Identify examples of public goods. 2. Analyze market failures. 3. Evaluate how the government allocates some resources by managing externalities.

3. American Free Enterprise What if the government decided to leave the business of road building up to private citizens? If you wanted a road in front of your house you would have to pay for it. You may have to pay to drive down Pearland Parkway or Hwy 35 to get to school each day.

4. American Free Enterprise Public Goods  Roads are an example of a public good.  Public Goods – a shared good or service for which it would be impractical to make consumers pay individually and to exclude non-payers.  Dams are another example of a public good.

5. American Free Enterprise  How would you feel if you (as a taxpayer) received a bill in your mailbox for your share of launching a space shuttle, cleaning Mount Rushmore, fixing I-45 for the many needed repairs, or building a new war ship.  To simplify the funding of government projects in the public interest, the government collects tax money from the public.

6. American Free Enterprise  Most of the goods are public because a private provider could not charge those who benefit or exclude non-payers form benefiting. Characteristics include…  Any number of consumers can use them without reducing the benefits to any single consumer.  Increasing the number of consumers does not increase the cost of providing the public good.

7. American Free Enterprise Costs and Benefits  Cost is critical in determining whether something gets produced as public good. 1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately. 2. The total benefits to society are greater than the total cost. In such circumstances, the market would not provide the good, the government would have to, or else it wouldn’t get done.

8. American Free Enterprise Public Sector – the part of the economy that involves the transactions of the government. Private Sector – the part of the economy that involves transactions of individuals and businesses, would have little incentive to produce public goods.

9. American Free Enterprise Free-Rider Programs  Is someone who would not choose to pay for a certain good or service, but would get the benefits of it anyway if it were provided as a public good.  Would you pay $ 5,000 to help finance the US troops in battle? {Probably not}  The government provides a system of national defense, you benefit whether you pay for it or not.

10. American Free Enterprise All citizens pay for fire protection through taxes so that all can benefit from the service. If the government stopped collecting taxes and relied on voluntary contributions, many public goods would have to be eliminated.

11. American Free Enterprise Market Failures:  Free-riders are an example of a market failure.  This is a situation in which the market does not distribute resources efficiently.  Building a road - - private company builds a toll way – could charge high tolls to drive on the road – no competition.  No roads would be built in sparsely populated areas – profit incentives are non-existing.  The criteria for a properly functioning market system do not exist in this situation.

12. American Free Enterprise Externalities:  An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.  Externalities are either negative or positive.

13. American Free Enterprise Positive Externality:  Public goods generate benefits to many people, not just those who pay for the goods.  These side effects are positive.  Private sector can generate more positive externalities more efficiently than the public sector can.

14. American Free Enterprise Example # 1 Dynamo Computer hires underprivileged teenagers and trains them to be computer programmers. Those workers are then available to be hired by other companies who benefit from the workers’ skills without having to pay for them.

15. American Free Enterprise Example # 2 Mrs. Garland buys an old house that is an eyesore in the neighborhood. She paints the house, cuts the grass, plants flowers, takes out all the old junk in the back yard, and adds other touches to the house. Her neighbors were not involved in her economic decision. But they receive benefits from it, such as higher property values and a better view.

16. American Free Enterprise Negative Externality  Cause part of the cost producing a good or service to be paid for by someone other than the producer.  Example #1 The Enchanted Forest paper Mill dumps chemical wastes into a nearby river, making it unsafe for swimming. The downstream city of Tidyville is forced to install special equipment at its water-treatment plant to clean up the mess. If the treatment cost is $ 20 per ton of paper produced, and the mill’s production is $ 100, the full or social cost to the mill is $ 120.00

17. American Free Enterprise Example # 2 I take up the accordion and demonstrate my progress by playing the last 5 minutes of class (each day) for the students. Unfortunately, you have to listen to bad accordion music each and every day. You suffer the negative externality.

18. American Free Enterprise Government Goals:  When externalities are present, we have a market failure, because the costs or benefits of a good or service are not assigned properly.  The government encourages the creation of positive externalities - - education – benefits students, society as a whole.  The government aims to limit negative externalities, such as pollution.  New cars are required to have expensive antipollution device called catalytic converter.