© 2001 by Prentice Hall, Inc.© 2001 by Prentice Hall, Inc.

ECONOMICS:

PRINCIPL

ES IN ACTIO

N

C H A P T E R

3

AMERICAN FREE E

NTERPR

ISE

C H A P T E R 3 AMERICAN FREE ENTERPRISE

SECTION 3Providing Public GoodsSECTION 4Providing a Safety Net

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A

STABLE, EFFICIENT, AND GROWING ECONOMY?

S E C T I O N 3

PROVIDING PUBLIC GOODS

What is a market failure?What are public goods?How does government manage

externalities?

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

MARKET FAILURES

A market failure is a situation in which the market, on its own, does not distribute resources efficiently.

Would the free market ensure that roads are built everywhere they are needed?

It’s doubtful. Neither could individuals afford to pay for a freeway.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

PUBLIC GOODS

Public goods are funded by the public sector, the part of the economy that involves transactions of the government.

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.

A public good is a shared good or service for which it would be impractical to make

consumers pay individually and to exclude nonpayers.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

EXTERNALITIES

The building of a new dam and creation of a lake generates:Positive Externalities

a possible source of hydroelectricpower

swimming boating fishing lakefront views

Negative Externalities loss of wildlife habitat due to

flooding disruption of fish migration along

the river overcrowding due to tourism noise from racing boats and other

watercraft

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.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

SECTION 3 REVIEW1. Which of the following is an example of the public sector of the economy? (a) consumers purchasing goods from a private company (b) laborers working for a private construction company (c) government funding for a new national park (d) individual donations to charity2. What is government's role in controlling externalities in the American

economy? (a) Government tries to encourage positive externalities and limit negative

externalities. (b) Government tries to limit all externalities because they represent market failure. (c) Government tries to limit positive externalities and encourage negative

externalities. (d) Government tries to encourage all externalities so that the market will be

competitive.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

S E C T I O N 4

PROVIDING A SAFETY NET

What role does the government play in fighting poverty?

What government programs attempt to aid those facing poverty?

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

THE POVERTY PROBLEMThe poverty threshold is an income level below that which is needed to

support families or households.

Welfare is a general term that refers to government aid to the poor.

The poverty threshold is determined by the federal government and is adjusted periodically.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

REDISTRIBUTION PROGRAMS

1. Temporary Assistance forNeedy Families (TANF)

This program allows individualstates to decide how to best use

federally provided funds.

2. Social Security

Social Security provides direct cashtransfers of retirement income to thenation's elderly and living expenses

to the disabled.

3. Unemployment InsuranceUnemployment compensation

provides money to eligible workerswho have lost their jobs.

4. Workers' CompensationWorker's compensation provides a

cash transfer of state funds toemployees injured while on the job.

Cash transfers are direct payments of money to eligible people.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

OTHER REDISTRIBUTION PROGRAMS

Besides cash transfers, other redistribution programs include:

In-kind benefits In-kind benefits are goods and services provided by the government for free or at

greatly reduced prices.

Medical benefitsHealth 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 benefitsFederal, state, and local governments all provide educational opportunities for the poor.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

3. GOVERNMENT PROVIDES SAFETY NETS

Transfer payments (remember Robin Hood?) Directly as cash or “in-kind” benefits (receiving goods and services directly

such as housing, food, health care)

We will discuss types of safety nets…

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

FOR POVERTYWhat’s poverty? Who is impoverished?

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

Persons in Household

2014 Federal Poverty Level (100% FPL)

1 $11,670 2 $15,730 3 $19,790 4 $23,850 5 $27,910 6 $31,970 7 $36,030 8 $40,090

POVERTY PROGRAMS

Section 8 housing (HUD) “subsidized”Food stampsFree/reduced school lunchLow-income home energy assistance programHead Start

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

TANF (Temporary Assistance for Needy Families) Work requirement “workfare”--W to W (welfare to work) Time limit (5 yr. lifetime limit) Since 1996, designed to be temporary & transitional

FOR MEDICAL CAREMedicaid—health insurance for low income people administered

by statesMedicare—health insurance for seniors (part of Social Security

Administration) Remember: “aid” to the poor, “care” for the elderly Children’s Health Insurance Program—(SCHIP) covers children who

don’t qualify under Medicaid.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

FOR INCOME/EMPLOYMENTUnemployment insurance—temporary

income benefit for those laid-off or unable to find a job (26 weeks, $405/week max.)

Minimum Wage Laws (federal and state) Federal = $7.25 CA = $8.00 currently

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

FOR DISABILITYSupplemental Security Income (SSI) Part of SSA, but not funded by payroll tax Provides income to people who cannot work due to physical or mental

disability or blindness.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

FOR CATASTROPHEFEMA (Federal Emergency Management Agency) disaster

relief, medical care, food, shelter, low-interest loans to individuals and businesses.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

FOR CATASTROPHEFEMA (Federal Emergency Management Agency) disaster

relief, medical care, food, shelter, low-interest loans to individuals and businesses.

EQ: HOW DOES THE PUBLIC SECTOR AND THE PRIVATE SECTOR INTERACT TO MAINTAIN A STABLE, EFFICIENT, AND GROWING ECONOMY?

ASSIGNMENT

Page 70 #1-6

SECTION REVIEW1. Welfare includes all of the following EXCEPT (a) Temporary Assistance to Needy Families. (b) Occupational Safety and Health Administration. (c) Social Security. (d) Medicaid.

2. Education programs make the economy more productive by (a) adding to human capital and labor productivity. (b) reducing taxes. (c) providing more jobs in manufacturing. (d) reducing injuries on the job.