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Government in the Free Market

Government in the Free Market . Public or Private Ownership. The Free Market is also known as Capitalism. http:// www.youtube.com/watch?v =BZV- Eiw_pGs. Minnesota Department of Education Social Studies Standards (2004) include in the high school economics standards (page 59)….

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Government in the Free Market

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  1. Government in the Free Market Public or Private Ownership

  2. The Free Market is also known as Capitalism • http://www.youtube.com/watch?v=BZV-Eiw_pGs

  3. 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.”

  4. 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

  5. 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.

  6. 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

  7. 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.

  8. 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.”

  9. The “standards” include examples… • Examples: 1. Protection from trespassers and thieves, protection from foreign invaders, enforcement of legal contracts

  10. 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.

  11. 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.

  12. 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.

  13. The Internet is a special example of this… • At least one writer has called the Internet

  14. 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…

  15. 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.

  16. 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?

  17. 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

  18. 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.

  19. The Free Rider problem • A free-rider is a person who receives the benefit of a good but avoids paying for it.

  20. 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.

  21. People can watch fireworks… • …without paying to watch them. • Can’t stop ‘em. • Thus…free riders

  22. 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.

  23. National Defense • Basic Research • Fighting Poverty • Others?

  24. A Lighthouse is the classic example

  25. 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.

  26. 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.

  27. The market fails to allocate resources efficiently when property rights are not well-established (i.e. some item of value does not have an owner with the legal authority to control it).

  28. 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

  29. 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.

  30. 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/

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