Chapter 3

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Transcript Chapter 3

Chapter 3
American Free Enterprise
Basic Characteristics
of the U.S. Market System
• Private Property
• Free Enterprise
• Self-Interest
• Competition
• System of Markets and Prices
• Limited Government
What do these items have in common?
Public Disclosure Laws
• Requires companies to give full
information about their products
• Makes buyers safer and informed or
Smoke and Mirrors
• Tobacco Industry Comes to Jesus
Role of Government
• Provide Public Goods and Services
• Correct for Externalities
• Maintains Competition
• Establish Legal Framework
• Redistribute Income
• Reduce inflation and unemployment
Americans have traditionally favored
economic freedom over economic
1. Consumers influence producers
through their buying decisions.
2. Consumers influence the
government’s economic policies
through voting and other
Public interest can be described as
concerns of the public as a whole.
Government responds to public interest by
enacting public policy, or laws and standards
on topics of public interest.
Consumers can influence public policy
through voting or by joining an interest
group, which is a private organization that
tries to persuade public officials.
Protecting Health, Safety, and Well-Being
Major Federal Regulatory Agencies
Many federal
whose goods
and services
affect the
well-being of
the public.
1906 Food and Drug
Administration (FDA)
Sets and enforces standards for food, drugs,
and cosmetic products
1914 Federal Trade
Commission (FTC)
Enacts and enforces antitrust laws to protect
1934 Federal Communications
Commission (FTC)
Regulates interstate and international communications
by radio, television, wire, and satellite, and cable
1958 Federal Aviation
Administration (FAA)
Regulates civil aviation, air-traffic and piloting
standards, and air commerce
1964 Equal Employment
Opportunity Commission (EEOC)
Promotes equal job opportunity through enforcement
of civil rights laws, education, and other programs
1970 Environmental Protection
Agency (EPA)
Enacts policies to protect human health and the
natural environment
1970 Occupational Safety and
Health Administration (OSHA)
Enacts policies to save lives, prevent injuries, and
protect the health of workers
1972 Consumer Product Safety
Commission (CPSC)
Enacts policies for reducing risks of harm from
consumer products
1974 Nuclear Regulatory
Regulates civilian use of nuclear products
• Government promotes growth and stability
• One measure of a nation’s macroeconomy is
gross domestic product (GDP).
• GDP is the dollar value of all final goods and
services produced in a certain economy.
• Helps predict business cycles
Public Goods
• A public good is a shared good or service for
which it would be impractical or inefficient
to make consumers pay individually to exclude
• Examples of public goods: national parks,
• Public goods are funded by the public sector, the
part of the economy that involves transactions of
the government.
• Cost determines whether it is a public good
or not – the total benefit to society is
greater than the total cost
Two Sectors
• Private – individuals, businesses,
and non-government entities
• Public – government entities
Free Rider
• Public Goods create
free riders.
• A free rider is
someone who
would not
choose to pay for
a certain good or
service, but who
would get the
benefits of it
anyway if it is
provided as a
public good.
Market Failures
Would the free market
ensure that roads are
built everywhere they are
It’s doubtful. Neither
could individuals afford
to pay for a freeway.
A market failure is a
situation in which the
market, on its own, does
not distribute resources
An externality is 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.
The building of a new dam and creation of a lake generates:
Positive Externalities
a possible source of hydroelectric
lakefront views
Negative Externalities
loss of wildlife habitat due to
disruption of fish migration along
the river
overcrowding due to tourism
noise from racing boats and other
Externalities: Examples
ANGA vs. Josh Fox on Natural Gas
• Seinfeld and the smelly car
Safety Nets
• When economic opportunities are limited,
because of lack of resources or few educational
opportunities, society encourages government
programs to help provide a safety net for those
who are living below what is considered an
acceptable standard of living.
The poverty threshold is an income level
below that which is needed to support
families or households.
The poverty
threshold is
determined by the
federal government
and is adjusted
• Welfare is a general
term that refers to
government aid to the
• Provides Safety Net
Redistribution Programs
Cash transfers are direct payments of money to
eligible people.
1. Temporary Assistance for
Needy Families (TANF)
This program allows individual
states to decide how to best use
federally provided funds.
3. Unemployment Insurance
Unemployment compensation
provides money to eligible workers
who have lost their jobs.
2. Social Security
Social Security provides direct
cash transfers of retirement
income to the nation's elderly and
living expenses to the disabled.
4. Workers' Compensation
Worker's compensation provides a
cash transfer of state funds to
employees injured while on the job.
Other Redistribution Programs
• In-kind benefits
 In-kind benefits are goods and services provided by the
government for free or at greatly reduced prices.
 Examples: food stamps, subsidized housing, legal aid
• Medical benefits
 Health insurance is provided by the government for the
elderly and disabled (Medicare) and for poor people who
are unemployed or are not covered by their employer’s
insurance (Medicaid).
• Education benefits
 Federal, state, and local governments all provide
educational opportunities for the poor through grants.
Property Rights
and Incentives
John Stossel Video Clip
Private Property
• Is Sharing Good?
• Why do animals we profess to value and want
to preserve continue to decline?
• Property Rights - formal and informal
rules that govern the ownership, use, and
transfer of property
• Incentives – rewards or punishment for
• The Buffalo Mystery
▫ Where did they go?
Tragedy of the Commons
• Common lands of the English villages were
consistently overused and rapidly depleted
• No incentive to preserve or upgrade the value of
the property when you don’t personally own it
• Common owners exploit a resource for fear that
someone else will do it before they can
Can You Explain…
• Why free-roaming
buffalo on the
Great Plains
disappeared but
herds of cattle did
not--even though
the cattle were
being driven to
slaughter houses?
• Buffalo has never been the major source
of meat for most Americans.
• Beef, on the other hand, became a food of
choice in the 19th Century and remains so
• In fact, in 2006, about 27,800,000,000 (yes
that is billion) pounds of beef were
consumed in the United States.
• And yet! No one has ever worried about
the possibility of “cattle extinction,” and
cows have never been near the
Endangered Species List.
Buffalo Bill claimed to have killed 4000 buffalo himself when he
worked for the Union Pacific Railroad.
• When Americans began moving across the
continent, more than 25 million buffalo
roamed freely on the Great Plains.
• In fact, some estimates claim as many as 60 to
100 million.
• From 1840 to 1860 the herds declined as they
were killed by Native Americans with
horses and rifles.
• In the 1860s professional hunters joined the
scene and the rate of decline increased.
• By 1890 the buffalo had almost disappeared. At
that time, estimates of the number remaining
varied from 500 to 1500.
Meriwether Lewis writes about the buffalo herds
they saw,August 29,1806.
"These last animals [the buffalo] are now so
numerous that from an eminence we discovered
more than we had ever seen before, at one time;
and if it be not impossible to calculate the moving
multitude, which darkened the whole plains, we
are convinced that twenty thousand would be no
exaggerated number."
Small Group Discussion
• Someone in each group re-read the
• Every on should have a least one clue.
• In round robin fashion, share your clue
with the group.
• All clues contain accurate information,
but all are not necessary to solve the
• Two Tasks: solve the mystery and
determine which clues are necessary to
solve the mystery.
• Appoint spokesperson for group
Class Discussion
• Each group report findings - try for group
• Who owned the bison on the Great Plains?
• Who bore the cost of keeping the buffalo
• Who reaped the benefits of keeping them
• What were the incentives for the hunters,
merchants, railroad owners, and the
military in the period after the Civil War for
the decimation of the buffalo?
• Why did the cattle not face possible
Management of Elephants
• Participating rural communities monitor
elephant herds
• Local communities issue trophy hunting
permits - providing incentives to maintain
the herd.
• Over $12,000 + a daily hunting fee of about
$1000 / day.
• The safari leader usually gets the daily fee.
• Villagers receive the trophy fee and the “meet
under a tree” and decide how it spent.
• 1989 international ban on the ivory trade, did
not consider places like Zimbabwe where
elephants are flourishing.
Where have the fish gone?
Most commercial fishermen would like to
maintain sustainable limits on fishing, yet
stocks seem to decrease each year. Why?
• Need incentives to preserve and protect.
• That is what is missing today for the
elephants, pandas, whales.
• They are treated as common property.
• Buffalo were saved by the establishment of
property rights to live buffalo.
• This establishes a great model to apply today
when analyzing modern environmental issues
and policies .