CHAPTER 3: AMERICAN FREE
ENTERPRISE
S.1: Benefits of Free Enterprise
S.2: Promoting Growth and Stability
S.3: Providing Public Goods
S.4: Providing a safety net
INTRODUCTION

What are the benefits
of free enterprise?
Makes it possible for
people who have ideas
& persistence to start
businesses and find
success
 Offers great deal of
economic freedom to
consumer

WHAT IS FREE ENTERPRISE?

U.S. considered to be “land of opportunity”


American tradition of Free Enterprise has been key
supporter of this
Characteristics





Profit motive: Key incentive; all decisions are made
w/ idea of increasing profit
Open opportunity: Anyone can participate in market
Legal Equity: Everyone has same legal rights….now..
Private Property: Own decisions about own property
Freedom to buy/sell: Own decisions about entering
agreements, and what/when/how to buy/sell
ROLE OF THE CONSUMER

Freedom to make own
economic choices


Voluntary exchanges
happen so businesses
know what and how
much to produce
Interest groups

Consumers can join
them to encourage
public officials to act
in ways to benefit
them
ECONOMIC FREEDOM & CONSTITUTION

Free enterprise is written into
the constitution

5th Am.: Protects private property
from being taken w/out due
process


Spells out how govt. can tax
people/businesses


Even though govt. can take land
for public reason
 Eminent Domain: but have to
pay fair price
Art. I: Congress can levy taxes
 Income tax didn’t happen till
16th am.
Guarantees people/businesses
right to make contracts
ROLE OF THE GOVT. IN MARKETPLACE

Govt. has many roles
Carrying out constitutional responsibilities to protect
rights, contracts, and other business activities
 Making sure that producers provide consumers with
information
 Protecting the health, safety, and well-being of
consumers

NEGATIVE EFFECTS OF REGULATION
Rules are costly to
implement
 Regulations stifle
competition
 Govt. spending
increased in industries
b/c have to hire workers
to do actual oversight

MAJOR FEDERAL REGULATORY AGENCIES

Identify one agency set
up to protect

Public Safety
FDA
 FAA
 CPSC


Fair competition
FTC
 FDIC


Equality

EEOC

How do you think the
FCC promotes the public
interests?

Making sure broadcast
communication conforms
to standards so consumers
can receive signals
3.2: PROMOTING GROWTH/STABILITY
“How
does U.S. Govt. promote
growth/Stability?”
top of notes

Learning objectives
Why govt.s track and seek to influence business
cycles
 How the gov.t promotes economic strength
 What factors increase productivity


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch03/Econ_OnlineLectureNotes_ch3_s2.swf
INTRODUCTION

How does the U.S.
Govt. encourage
growth/stability?





Tracking Business
Cycles
Promoting High
employment
Keeping prices stable
Encouraging
development of new
technologies
Pride in American
Work ethic
TRACKING BUSINESS CYCLES
Govt. often intervenes to influence
macroeconomic trends
 One measurement of well-being is GDP


Gross Domestic Product


Measurement of total goods/services produced in year
Business Cycle: pattern of expansion followed by
contraction
Expansion
 GDP goes up
 Contraction
 GDP goes down


Why do govt experts track the business cycle?

So they can see where country is and make
predictions
PROMOTING ECONOMIC STRENGTH

High Employment



Economic Growth


Govt. works to ensure jobs for everyone available
4-6% unemployment is healthy
To help spur growth, govt. can cut taxes or increase spending
Stability and Security
One indicator can be price levels, another is banks/financial
institutions
 Government looks to prevent sudden shifts in prices to avoid
consumer/producer suffering
 Govt. Regulations seek to keep banks/financial inst.’s stable;
think bailout!!


Economic Citizenship

Voters have a say in promoting economic strength by:


Voting for public officials
Voting on referendums
TECHNOLOGY AND PRODUCTIVITY

How does tech improvement
help economy?

Allows economy to operate more
efficiently


Helps increase productivity
 Light bulb made longer
workdays
 Assembly line: mass production
Govt.s promote
innovation/invention to
maintain a technological
advantage by:
Funding R & D projects @
universities
 Est. own research institutions:
NASA
 Grant patents/copyrights,
incentives to innovation

AMERICAN WORK ETHIC

Growth cannot occur w/out
indiv. Effort
Americans have pride in
strong work ethic, not only
ethic but the work they do
 Work ethic has long been
seen as a key ingredient in
U.S.’s success

SECTION 3
Bell Work: During Europe Video over
Unemployment
Copy down chart on pg. 62
Fill in chart from pg. 56
Finish 23, 108 from Workbook
SECTION 3
“Why
does a society provide
public goods?”

Objectives
Examples of Public Goods
 Understand market failures
 How govt.s allocate resources to manage externalities


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/produc
ts/0-13-3698335/Flash/Ch03/Econ_OnlineLectureNotes_ch3_s3.swf
INTRODUCTION

Why does a society
provide public goods?

B/C it would be
inefficient/impractical
for a free market to
provide them
PUBLIC GOODS


Shared good/service that
would be
inefficient/impractical to
make consumers pay for or to
exclude those who can’t
Maintaining Streets is one
example



Signs, lights, conditions, etc.
Used by any # of people w/out
reducing its benefits
Financed by public

Police, firefighters, etc.
PUBLIC GOODS: COSTS/BENEFITS

What 2 Criteria must
be present for a public
good?
Benefit is less than cost
each individual would
have to pay if privately
provided
 Total Benefits to society
are greater than total
cost

PUBLIC GOODS: COSTS/BENEFITS

Govt. pays for public
goods through…….


Taxes
Financial burden
become much less
than if private funded
PUBLIC GOODS: FREE RIDER PROBLEM

“Free Riders”


People not willing to pay for certain good/service but would
benefit from its offering as public good
Government stops providing public good

Instead relying on “donations/contributions


Some people would “refuse” to pay and many services would be
eliminated
Examples

National Roads


Pay for a road in Florida/Texas? RIGHT!!
 But you would benefit from easier trucking routes/vacations
Firefighting
 Not everyone would pay for fire protection.
 Neighbors could spread to yours and they don’t pay for it?

Provided as public good!
MARKET FAILURES: READ SECTION

Why are public goods an
example of market
failure?

Shows where the free
market does not
distribute resources
efficiently

Example: Building roads.
How many people could
afford to privately pay for
road usage and to build
roads
EXTERNALITIES: ECONOMIC SIDE-EFFECTS

Positive Externalities
Benefits of public
goods
 Allow someone who
didn’t purchase a good
to enjoy part of
benefits

Negative Externalities
Cause part of the cost of
producing good/service
 Paid by someone other
than producer



Look at 3.3 pg. 66

Answer 2 ?s
GOVERNMENT GOALS

Understanding externalities helps us see the
roles that govt. plays in U.S. economy

Takes action to create positive externalities


Takes actions to limit negative externalities


Improving education
Pollution, health issues.
Many economists feel the private sector produces
more pos. externalities than the govt.

“With less” regulation companies wouldn’t eat as
much money in costs meeting them, but would also
be encouraged to find their own methods of better
meeting broad requirements.

Just an argument though, pros/cons for each side
SECTION 4
Bell Work
Finish Chart from Section 3
Copy Chart from Section 4
Create 10 Vocab cards that you can quiz a
partner on later. Use sheets in front. Due
tomorrow
S.4: PROVIDING A SAFETY NET
 “How
does Government help the
poor?”

Objectives
Understand U.S. debate on ways to fight poverty
 See main programs to redistribute wealth
 How govt. encourages private efforts to help needy


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/prod
ucts/0-13-3698335/Flash/Ch03/Econ_OnlineLectureNotes_ch3_s4.swf
INTRODUCTION

How does the government help the poor?

To help the poor govt. programs take money from
some people and redistribute it to others

Program examples:
 Welfare system
 Cash transfers
 In-kind benefits
 Medical Benefits
 Educational benefits
 Grant Money
POVERTY PROBLEM

Problem
Free markets create uneven wealth distribution
 Poverty “threshold” is set based on the cost of goods a
family NEEDS to buy


Governments Role

Provides a safety net to groups through federal, state,
and local govt. programs


Young, old, sick, poor, disabled
Welfare Program

Collects funds from taxpayers to redistribute money to
needy
 Began during……?

Great Depression
WELFARE REFORM

Critics of welfare
Claim it discourages productivity and furthers
poverty
 1996 new reforms limited amount of time people
could receive welfare


Also gave states more freedom to experiment w/anti-poverty
programs
REDISTRIBUTION PROGRAMS

Cash Transfer Programs

(TANF) Temporary Assistance
for Needy Families

Welfare payments to states who
run own programs
Social Security- Collects money
from current workers and
redistributes to retired/disabled
people
 Unemployment InsuranceProvides $$ to workers who lost
jobs; need to proof making effort
to work



Temporary: 26 weeks in most
states
Workers compensation- Provides
state funds to workers injured on
the job
IN-KIND BENEFITS

Govt. provides poor
people w/ benefits

Food stamps


Subsidized housing


Assistance for food
Less $ for rent
Legal aid

No charge legal advice
MEDICAL AND EDUCATIONAL BENEFITS

Govt. provides health care to…..
Elderly (Medicare)
 Disabled/poor (Medicaid)
 Uninsured children (SCHIP)


Govt. funds educational programs from preschool to college

Cheaper State colleges, reduced lunch, free-preschool
ENCOURAGING PRIVATE ACTION

How does tax law provide an incentive to help the
needy?
Read section on pg. 72
 Federal tax laws allow individuals/corporations tax
deductions for charities
 Government can also provide grants/other assistance
to organizations that provide social services

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Chapter 3: American Free Enterprise