Basics of Economics – Day 9

Goals: Role of Government in a Free Enterprise System – The students will1. Work in the library for the first half of class2. Learn about the government as an enforcer of

contracts.3. Learn about the government as the provider of

nonexcludable public goods.4. Learn about externalities.

What is a contract?◦ An agreement between two or more individuals that

proposes consideration in exchange for a promise to do something. What is consideration?

Something of value

In our society today, the government stands ready to enforce contracts through the courts.◦ Can you describe a situation in which a trial would

be necessary to prevent one business from dealing unfairly with another?

Government as the Enforcer of Contracts

Goods are categorized into two types:◦ Private Goods

A good in which one person’s consumption takes away from another person’s consumption. E.g., If Bill is working on the computer, Jane cannot use

the computer.

◦ Public Goods A good in which one person’s consumption does not

take away from another person’s consumption. E.g., a movie in a movie theater and a college lecture.

Public Goods and Private Goods

Excludable Public Goods◦ A good that individuals can be stopped from

consuming it (physically excluded). E.g., If you go to the movie theater and do not pay

the ticket price, then the theater owner will not permit you to enter the theater.

Nonexcludable Public Goods◦ A good that individuals cannot be stopped from

consuming. E.g., National defense is a public good because one

person’s consumption of it does not detract from another person’s consumption.

Excludable and Nonexcludable Goods

In a free enterprise system, economists believe no one will want to produce nonexcludable goods. Why?◦ Because once it is produced, no one will pay for it since they

can get the benefit free. This is called a free rider. What entity is the one that most generally produce

nonexcludable goods? The government. How does the government fund the

production/operation? Taxes.

◦ People in a free enterprise economy will produce those things that they can withhold from buyers if they do not get paid for producing them.

Who will produce Nonexcludable Goods

Negative externality – an action that has an unintended adverse impact on a third party.◦ What is an example?

A neighbor playing music so loud that you can hear it at your house.

Positive externality – an action that has a positive third party impact.◦ What is an example?

When a beekeeper’s bees migrate to a neighbor’s flower bed.

Externalities

Court system – nuisance lawsuits

Government regulations – e.g., pollution standards

Taxation◦ Be careful, raising taxes can do what to prices?

How do you get relief from a negative externality?

http://viewpure.com/1FQyKMxv4mA

Video on Externalities