3-3: Government and Free
Enterprise
Providing Public Goods
• How do we decide which sector of
the economy should produce a good
or service?
▫ Free enterprise will produce a
good if all benefits go to the
buyers and sellers
Market Failure
• Definition: Occurs when people who
are not part of a marketplace
interaction benefit from it or pay
part of its costs
What are public goods?
• Goods and services that are
provided by the public as a group
Characteristics of Public Goods
• People cannot be excluded from the
benefits of the product even if they
don’t pay for it
• One person’s use of the product
does not take away from its
usefulness to others
Examples of Public Goods
• City street lighting
• National defense
Free Rider
• Definition: person who avoids
paying for a good or service but is
able to benefit from that
good/service
• Free rider is an example of market
failure
Example of a Free Rider
• Example: fireworks display
Public and Private Sector—
Shared Responsibilities
• One shared responsibility:
infrastructure—all goods and
services necessary for society to
function
• Examples: highways, bridges,
airports
Externalities
• Another type of market failure
• Definition: side effect of a product
that affects someone other than the
producer/buyer
Negative Externality
• Definition: externality that has a
negative effect, or cost, on people
who were not involved in the
original economic activity
• Example: pollution
Limiting Negative Externalities
• Can be eliminated by the
government through taxes and fines
Positive Externality
• Definition: externality that creates
benefits for people who were not
involved in the original economic
activity
• Example: a park, rose garden, etc
Spreading Positive Externalities
• A subsidy is one way to increase a
positive externality
▫ Definition: a government payment
that helps cover the cost of an
economic activity that has the
potential to benefit the public as a
whole
Public Transfer Payments
• A government program designed to
protect people from economic
hardship is known as a safety net
Redistributing Income
• One way to redistribute income is
through transfer payments—
transfer of income from one person
to another even though the person
receiving the payment does not give
something in return
• Example: money received as a gift
Public Transfer Payment
• Definition: a transfer payment in
which the government transfers
income from taxpayers to recipients
(who do not provide anything in
return)
Social Security
• An example of a transfer payment
• Taxes are taken out of our
paychecks and used to fund the
retirement of those eligible for
Social Security benefits