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  • Gives the right to own & exchange private property voluntarily
  • Open opportunity: ability to enter & compete in the market by choice
  • Legal equality: everybody has the same economic right under the law
  • Free contract: right to decide which legal agreement to enter into
  • Profit motive: incentive to gain from economic activity
  • Example: Profit in Rocks
  • 1975 Pet rock became a very popular & profitable gift during the holiday season
  • Early 1976 consumers stopped buying & the owner got out of the business
  • Example: Competition over books
  • Demand for books high, competition driving out small booksellers
  • Before 1995, small chain stores & independent neighborhood booksellers dominated book market
  • 1995, large chains offered discounted prices, appealing atmosphere
  • 1995, online booksellers open w/ huge numbers of titles, low prices
  • Small store now offer personal service, specialized or local topics
  • Market failure occurs when economic transactions causes externalities
  • Externality: side effect on someone other than buyer or producer
  • negative externality: people uninvolved in the transaction buy cost
  • positive externality benefits people in the transaction buy cost
  • Example: Paying for Negative Externalities
  • Factory owners: little encouragement to pay to cut industrial pollution
  • Government limits negative externalities through taxes & fines
  • offset medical cost & provide incentives to reduce pollution
  • Example: Spreading positive externalities
  • A new local college business, community as a whole
  • The government tries to increase positive externalities
  • Subsidy: government payment to help cover cost of economic activity

Managing Externalities

What is a Free Enterprise System?

  • Free to choose
  • Believes market should be free to operate in all fields
  • Thinks government's most important economic role is control money supply, w/out this government would experience inflation
  • Served as adviser to two U.S. presidents & foreign heads of state
  • 1976 he won Nobel Prize for Economics
  • Recent years a scholar has founded an organization promoting educational freedom

Milton Friedman: Promoter of Free Markets

  • Capitalist system also known as free enterprise system
  • anybody is free to start a business or enterprise
  • Example: United States
  • Entrepreneurs are free to start a business and choose how to use their money/ resources
  • Consumers choose which goods & services they will buy
  • The government protects or encourages competition, enforces contracts
  • Emerging Markets
  • Most countries have mix of tradition, government involvement, free enterprise
  • Mexican government rules & regulations make starting a business hard
  • Street vendors don't follow regulations & have driven some retail stores out of business
  • Singapore government is very involved & keeps business costs low
  • Requires employers to pay benefits
  • Requires workers to put a percentage of income in a government savings scheme
  • Government is important but with limited role in U.S. economy
  • Modified free enterprise economy:
  • government protections, provisions, regulations adjust capitalism
  • Modified Free Enterprise
  • Like businesses any household, government is consumer & produce
  • as consumer, buys factors of production in resource market
  • as consumer, buys products in product market
  • as producer, provides goods & services t businesses, households
  • collects taxes in payments, uses them to pay for resources & products

Government in the U.S. Economy

The American Free Enterprise System

The Roles of Producers & Consumers

  • Consumer try to get the best deal for their money
  • Producers try to earn the most profit
  • Profit: money left after production costs subtracted from sale price
  • Example: Producers Seek Profit
  • Neighborhood coffee shop demonstrates how producers help allocate resources`
  • to earn profits, charge highest price consumers are willing to pay
  • profits encourage others to open similar businesses
  • result: productive resources are directed towards the coffee shop
  • Example: Consumers Vote with Their Wallets
  • Consumers help allocate resources through their choice of product
  • their choices will guide producers to provide what consumers will buy/ want
  • Early 2000s, low-carbohydrate diets became popular
  • food producers put some of their resources into low-carb market to meet consumer demand
  • 2004, producers cut back when consumers interest declined

By: Antonio Torres & Alexandra Rivera

Period: 3

Public Transfer Payments

  • A limitation of free enterprise:
  • people unable to contribute cannot access all economic opportunities
  • Safety net: government programs designed to protect people from economic hardship
  • Redistributing Income
  • Transfer payments move income from person or group to another
  • recipient does not provide product in return
  • Public transfer payment: made by government w/ tax money
  • Most public transfer payments in area of social spending
  • the money usually go to the poor, aged, disabled, or people who have lost their jobs

Street lighting is an example of a public good.

Providing Public Goods

  • Public sector: branches of government that make production decisions
  • Market failure: outsiders benefit from or pay for marketplace interaction
  • Public goods: products provided by government, consumed by public
  • Public goods founded w/ taxes
  • Example: Characteristics of Public goods
  • Two characteristics of public goods:
  • people who do not pay cannot be excluded
  • one person's use does not make product less useful to others
  • Street lighting is impossible to determine the price or benefit for people
  • Example: Free Riders
  • free rider: person who benefits but does not pay for good or service
  • only way to have public goods for government to fund w/ taxes
  • Examples: 4th of July, law enforcement
  • Public & Private Sectors: Shared Responsibilities
  • Some goods provided by either public or private sector
  • toll goods: consumed by the public but people can be excluded
  • Infrastructure: the goods & services needed for society to function
  • examples: highways, water, health care, sewer

How a free Enterprise System Works

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