Government in the Free Market
Public or Private Ownership
The Free Market is also known as
Capitalism
• http://www.youtube.com/watch?v=BZVEiw_pGs
Minnesota Department of Education Social
Studies Standards (2004) include in the high
school economics standards (page 59)…
• “The student will understand the basic
characteristics of markets and the role of prices
in modern market economies.” (Standard IV, A)
• “The student will understand the economic role
of government in a free market economy.”
The Free Enterprise or Market System
has basic characteristics:
• Free enterprise system, Free Market
System or Capitalism all require…
• an economic system based on
private ownership of productive
resources
The Free Enterprise or Market System
has basic characteristics:
• “Private” means that individual
citizens are the owners of the means
of production-the land, labor and
capital.
• And…individuals are the Entrepreneurs.
The Free Enterprise or Market System
has basic characteristics:
• Open Opportunity to enter the market
– Producers are free to produce the goods and
services consumers want
– Consumers are free to decide how to best meet
their needs and wants
• Legal Equality
– Everyone has the same economic rights
• Free Contract
– People decide which legal agreements to enter
into
The Free Enterprise or Market System
has basic characteristics:
• The desire for profit drives producers to
supply goods and services to the market
• The desire for consumer satisfaction drives
consumers to purchase products in the
market.
The Minnesota “Standards” also include
• The student will understand the economic role
of government in a free market economy.
• “1. Students will identify that one important
role for government in the economy is to
secure and enforce property rights.”
The “standards” include examples…
• Examples: 1. Protection from
trespassers and thieves, protection
from foreign invaders, enforcement
of legal contracts
We will focus on the second part of
this standard:
• 2. “Students will identify and explain public
goods.”
• It will be our objective to distinguish
between private goods (owned by
individuals) and public goods (owned by
government) using some basic economic
principles.
Some goods are “free goods”…
• Free goods are so abundant, anyone can have
them. Sunshine? Weeds? Air?
• Free goods provide a special challenge for
economic analysis.
• Most goods in our economy are allocated in
markets and have ownership and a price.
• Free goods do not.
Free goods…
• When a good does not have a price attached
to it, private markets cannot ensure that the
good is produced and consumed in the proper
amounts.
• In such cases, government policy can
potentially remedy the market failure that
results, and raise economic well-being.
The Internet is a special example of
this…
• At least one writer has called the Internet
The High Tech Gift Economy
• Why does Barbrook call it that?
• Because many early (and current) web
designers and programmers believed that the
“open source” software and information was
to be shared with little or no charge to users.
• This is a most idealistic idea, but…
SOPA and PIPA
• It is the root of the current debate over the
“Stop Online Piracy Act”– SOPA and
• “Protect Intellectual Property Act”- PIPA
• These are the Congressional Bills that were
being protested yesterday on Google and
Wikipedia, to name two of many sites.
Other than the Internet, which is a
special case,
• When thinking about the various goods in the
economy, it is useful to group them according
to two characteristics:
– Is the good excludable?
– Is the good rival?
Excludability and Rivalry:
• Excludability
– Excludability refers to the property of a good
whereby a person can be prevented from using it.
• Rivalry
– Rivalry refers to the property of a good whereby
one person’s use diminishes other people’s
• Private Goods
–Are both excludable and rival.
• Public Goods
–Are neither excludable nor rival.
• There are also “common resources” and
natural monopolies, but we aren’t going to
focus on those.
The Free Rider problem
• A free-rider is a person who receives the
benefit of a good but avoids paying for it.
• Since people cannot be excluded from
enjoying the benefits of a public good,
individuals may withhold paying for the good
hoping that others will pay for it.
• The free-rider problem prevents private
markets from supplying public goods.
People can watch fireworks…
• …without paying to watch them.
• Can’t stop ‘em.
• Thus…free riders
• Solving the Free-Rider Problem
– The government can decide to provide the public
good if the total benefits exceed the costs.
– The government can make everyone better off by
providing the public good and paying for it with
tax revenue.
•
•
•
•
National Defense
Basic Research
Fighting Poverty
Others?
A Lighthouse is the classic example
Since ships can see the light without
paying a fee…
• No one ship owner will build a lighthouse
because of the Free Rider Effect.
AND…The lighthouse light is:
Non-Excludable – Can’t stop ships from seeing light
And
Non-Rival- One ship using the light does not
affect others using it.
• The Tragedy of the Commons is a parable that
illustrates why common resources get used
more than is desirable from the standpoint of
society as a whole.
– Common resources tend to be used excessively
when individuals are not charged for their usage.
– This is similar to a negative externality.
• The Dodo Bird was a victim of this tragedy…it
tasted good and could not fly.
• The market fails to allocate resources
efficiently when property rights are not wellestablished (i.e. some item of value does not
have an owner with the legal authority to
control it).
Let’s think about a variation
• Why do governments provide professional
sports stadiums?
• Are Pro Sports non-excludable?
• Are Pro Sports non-rival?
• No to both:
• Tickets exclude free riders
• And there are just so many seats in a stadium
• So…Pro Sports teams and their stadiums are
not true public goods.
• Why then do governments build them fairly
often…or at least contribute tax money in part
to build stadiums?
• Come up with 3 reasons why this happens.
Please Read the following
• Find 3 arguments PRO and 3 arguments
AGAINST having the taxpayers pay for all or
part of a new Vikings stadium. (Note: Your
personal opinion of the Vikings is not an
argument item.)
• http://www.minnpost.com/lizfedor/